UNIVERSITY  OF  CALIFORNIA 
AT  LOS  ANGELES 


YALE  READINGS   IN   INSURANCE 
LIFE 


YALE  READINGS  IN  INSURANCE 


LIFE    INSURANCE 


EDITED    BY 

LESTER    W.  ZARTMAN,  PH.D. 

ASSISTANT  PROFESSOR  OF  POLITICAL    ECONOMY,  YALE    UNIVERSITY 


NEW  HAVEN,  CONNECTICUT 

YALE   UNIVERSITY   PRESS 

LONDON 

HENRY    FROWDE 

OXFORD  UNIVERSITY  PRESS 

1909 


Copyright,  1909,  by 
YALE  UNIVERSITY  PRESS 


Entered  at  Stationer?  Hall,  London 


Printed  in  the  United  States 


•Library 


•o 
I 

O 
2 


g  PREFACE 

THE  "Yale  Lectures  on  Life  Insurance"  appeared  five 
years  ago.  Although  a  considerable  edition  was  printed, 
the  unexpectedly  large  demand  soon  exhausted  it,  and  as 
the  plates  were  destroyed,  for  two  years  the  lectures  have 
been  out  of  print. 

*>          It  seems  desirable  that  either  a  new  edition  of  the  lec- 

N.^    tures  should  be  printed,  or  that  something  new  should  be 

published  in  their  place.    The  latter  alternative  has  been 

chosen,  and  instead  of  simply  reprinting  the  old  lectures, 

the  plan  has  been  adopted  of  selecting  special  readings, 

partly    from    the    "Yale    Lectures,"    partly    from    other 

sources.     This  plan  was  preferred  for  two  reasons.     In  the 

\      first  place,  many  changes  have  taken  place  in  the  insurance 

business  since  the  old  lectures  were  given,  and  much  new 

|      and  valuable  material  has  appeared.     In  the  second  place, 

"!v     it  has  been  thought  that  by  not  confining  the  readings  to 

r*      the  old  lectures  a  more  comprehensive  treatment  could  be 

secured.     In  this  way  it  has  been  hoped  to  broaden  the 

scope  of  the  new  readings,   and  thus  to  increase  their 

usefulness.     Only  four  of  the  lectures  included  in  the  old 

volume  are  reprinted,  and  three  of  these  have  been  partly 

rewritten.     Some  of  the  matter  now  published  has  never 

appeared   before,  and  much  of  the  remainder  has  been 

revised. 

In  selecting  these  readings,  the  aim  has  been  to  avoid 
those  authors  who  treat  the  subject  in  technical  language, 


vi  PREFACE 

as  well  as  to  avoid  those  who  make  the  subject  more  simple 
than  it  really  is,  and  thus  conceal  its  real  problems.  The 
broad  selection  of  material  would  not  have  been  possible 
without  the  cooperation  of  others.  It  is  a  pleasure  to 
acknowledge  the  fine  spirit  of  publishers  in  permitting 
reprints  from  copyrighted  books,  and  the  willingness  of 
authors  to  revise  articles  where  changed  conditions  made 
revision  desirable. 

LESTER  W.  ZARTMAN. 

NEW  HAVEN, 

August,  1909. 


CONTENTS 

CHAPTER  I 


ELIMINATION  OF  RISK 


CHAPTER  II 
FUNCTION  OP  LIFE  INSURANCE 14 

CHAPTER  III 
HISTORY  OF  LIFE  INSURANCE;  PERIOD  OF  EARLY  BEGINNINGS      36 

<y 

CHAPTER  IV 
ORIGIN  OF  LIFE  INSURANCE  THEORY 46 

CHAPTER   V 
J  HISTORY  OF  LIFE  INSURANCE  IN  GREAT  BRITAIN      ....       57 

CHAPTER   VI 

HISTORY  OF  LIFE  INSURANCE  IN  THE  UNITED  STATES    ...       77 

CHAPTER   VII 
THE  THEORY  OF  RISK 97 

CHAPTER   VIII 
MORTALITY  TABLES 107 

CHAPTER  IX 
ASSESSMENT  LIFE  INSURANCE 122 

CHAPTER  X 
FRATERNAL  LIFE  INSURANCE       132 

CHAPTER   XI 
NET  PREMIUMS 155 

CHAPTER   XII 
PROVISION  FOR  EXPENSES 175 

vii 


vni  CONTENTS 

CHAPTER  XIII 
RESERVE 183 

CHAPTER  XIV 
NET  VALUATION 192 

CHAPTER  XV 
POLICY  CONTRACTS 207 

CHAPTER  XVI 
POLICY  CONDITIONS 234 

CHAPTER  XVII 
SURRENDERS  AND  LOAN  PRIVILEGES 246 

CHAPTER  XVIII 
EXPENSES  FOR  AGENTS 254 

CHAPTER  XIX 
DISTRIBUTION  OF  SURPLUS 260 

CHAPTER  XX 
DEFERRED  DIVIDEND  POLICIES 273 

CHAPTER   XXI 
ECONOMIC  ASPECT  OF  LENGTHENING  HUMAN  LIFE     ....     287 

CHAPTER   XXII 
CONTROL  OF  LIFE  INSURANCE  COMPANIES        299 

CHAPTER  XXIII 

MISTAKES  IN  STATE  REGULATION  OF  THE  INSURANCE  BUSINESS    312 

CHAPTER   XXIV 
FEDERAL  SUPERVISION  OF  INSURANCE 334 

CHAPTER   XXV 
NECESSITY  FOR  REFORM  OF  LIFE  INSURANCE  TAXATION      .      .     363 

CHAPTER  XXVI 
INDUSTRIAL  INSURANCE 382 

INDEX  399 


YALE  READINGS  IN  INSURANCE 
CHAPTER  I 

ELIMINATION   OF  RISK  1 

BUSINESS  men  try  not  only  to  estimate  the  risk  which 
they  must  encounter  and  to  adjust  their  accounts  accord- 
ingly, but  they  also  endeavor  to  avoid  such  risks  alto- 
gether. This  follows  from  the  existence  of  the  factor  of 
caution.  Where  the  coefficient  of  caution  is  abnormal, 
amounting  to  mcaution,  risks  are  not  avoided,  but  are 
expressly  sought,  and  the  phenomena  of  gambling  and 
indiscriminate  speculation  are  the  result.  But  in  the 
great  majority  of  men  there  exists  a  healthy  fear  of  risks, 
and  in  consequence  a  tendency  to  avoid  or  reduce  them. 

There  are  five  principal  ways  in  which  risks  may  be 
reduced,  viz.:  — 

1.  By   increasing   guaranties   for   the   performance   of 
contracts. 

2.  By  increasing  safeguards  against  incurring  losses. 

3.  By  increasing  foresight  and  thereby  diminishing  the 
risks. 

4.  By  insurance,  that  is,  by  consolidating  risks. 

5.  By  throwing  risks  into  the  hands  of  a  special  class 
of  speculators. 

These  will  be  considered  in  order. 

The  ownership  of  capital  wealth  necessarily  involves 

1  By  Irving  Fisher,  Professor  of  Political  Economy  in  Yale  Uni- 
versity. Reprinted  from  pages  288-300  of  "The  Nature  of  Capital 
and  Income,"  by  special  arrangement  with  the  publishers,  Macmillan 
and  Co.,  New  York. 

1 


2  YALE  READINGS  IN  INSURANCE 

risk,  since  the  income  from  it  can  only  be  estimated,  — 
never  precisely  foreknown.  But  it  is  possible,  by  a  divi- 
sion of  the  ownership  of  capital  wealth,  for  one  class  of 
property  holders  to  assume  the  burden  of  risks  and  to 
guarantee  to  another  class  a  fixed  income.  This  is  the 
primary  reason  for  the  separation  of  securities  into  two 
great  classes  called  stocks  and  bonds.  In  any  large  enter- 
prise the  stockholders  take  the  risks,  and  by  so  doing 
guarantee  to  the  bondholders  a  fixed  income.  As  was 
remarked  in  a  previous  chapter,  the  capital  stock  acts  as 
a  buffer  between  the  liabilities  and  the  assets,  which 
amounts  to  saying  that  it  guarantees  a  fixed  income  to 
the  holders  of  the  liabilities.  President  Hadley  has  em- 
phasized the  fact  that  a  bondholder  "commutes"  the  pre- 
carious income  of  an  enterprise  into  a  fixed  annuity,  and 
that  the  system  by  which  one  class  receives  "interest"  and 
another  "profits"  has  its  origin  in  the  desire  of  one  class 
to  avoid  and  the  willingness  of  another  to  assume  risks.1 

Nevertheless  the  general  relation  between  creditor  and 
debtor  necessarily  carries  with  it  a  certain  amount  of  risk 
to  the  creditor.  This  risk  may  be  reduced  by  the  deposit 
of  collateral  security  or  indorsement2  as  in  the  case  of 
bank  loans  and  discounts;  by  mortgage  on  real  estate,  or 
occasionally  on  chattels;  by  legal  regulations,  as  in  the 
case  of  notes  of  national  banks,  and  by  other  methods. 

1  But  the  "rate  of  commutation"  is  not  a  rate  of  interest,  since  any 
ratio  of  commutation  is  necessarily  a  ratio  between   two  incomes, 
those  respectively  of  the  stockholders  and  the  bondholders,  whereas 
the  rate  of  interest  is  a  ratio  of  income  to  capital. 

2  The  influence  of    indorsement  in  reducing  risk  is  greater  than 
would  appear  on  the  surface.     Thus,  if  there  is  one  chance  in  a  hun- 
dred that  the  signer  of  a  note  will  default,  and  a  like  chance  for  his 
indorser,  both  these  risks  being  independent,  the  chance  that  the  bank 
will  lose  is  the  product  of  these  two,  or  only  one  chance  in  ten  thousand. 
Hence,  two-name  commercial  paper  is  ordinarily  a  safe  security,  pro- 
vided, of  course,  the  names  are  those  of  reliable  business  men,  such 
as  have  a  high  "rating"  in  Bradstreet's  or  other  standard  commer- 
cial agency. 


ELIMINATION  OF  RISK  3 

The  method  of  guaranties  is  really  a  method  of  shifting 
risks  rather  than  of  avoiding  them.  The  second  method 
aims  to  reduce  risk  by  special  safeguards.  Some  articles 
of  wealth  exist,  in  fact,  simply  for  the  sake  of  meeting 
sudden  unforeseen  emergencies.  This  is  true,  for  instance, 
of  fire  engines,  fire  extinguishers,  safety  appliances  on  rail- 
ways, safety  valves,  and  other  devices  connected  with 
steam  engines  and  machinery,  burglar  alarms,  safety 
deposit  vaults,  etc.  To  a  large  extent  this  risk-meeting 
function  applies  to  almost  every  stock  of  wealth.  Food 
in  a  pantry  usually  exists  beyond  certain  wants  in  order 
to  provide  for  tmcertain  wants,  and  when  sources  of 
supply  are  distant,  such  stores  of  food  need  to  be  large. 
Especially  is  this  true  in  the  case  of  armies.  Again,  a  fac- 
tory will  usually  have  a  large  reserve  stock,  both  of  raw 
materials  and  finished  products,  in  order  to  meet  unex- 
pected demands.  In  like  manner,  jobbers,  wholesalers,  and 
retailers  maintain  a  sufficient  stock  of  goods  to  meet  not 
only  the  foreseen,  but  some  of  the  unforeseen  demands 
of  their  customers.  The  function  of  speculators  in  grain 
or  other  commodities  consists  largely  in  conserving  the 
stock  of  a  community  as  a  safeguard  against  future  scar- 
city. Almost  all  of  what  is  called  the  reserve  of  a  bank  is 
used  as  a  safety  fund  to  meet  the  unforeseen  demands  of 
note-holders  and  depositors,  and,  in  particular,  to  meet  a 
special  "run."  These  reserves  often  remain  as  idle  as  a 
fire  extinguisher  for  years  or  even  decades  against  the  hour 
of  need.  It  is  said  that  there  are  bars  of  precious  metals 
in  the  Bank  of  England  which  have  lain  there  undisturbed 
for  two  centuries.  A  large  part  of  the  cash  carried  by  an 
ordinary  individual  is  quite  analogous  to  a  bank  reserve, 
being  held  to  meet  special  emergencies.  Some  individuals 
even  keep  in  a  separate  pocket  a  special  gold  piece,  lest 
some  day  they  should  become  "stranded."  It  may  be 
said  that  this  risk-meeting  function  of  pocket  cash  is  the 
chief  compensation  for  the  so-called  "loss  of  interest"  on 
the  money  thus  carried.  The  convenience  and  security 


4  YALE  READINGS  IN  INSURANCE 

obtained  by  having  an  adequate  supply  is  a  species  of 
income  replacing  the  income  which  might  be  earned  were 
the  sum  invested.  The  same  principles,  from  the  stand- 
point of  an  individual,  apply  to  bank  deposits,  and  thus 
to  the  whole  volume  of  the  circulating  medium. 

The  third  method  of  reducing  risks  is  by  increasing 
knowledge.  It  has  been  seen  that  risk  is  nothing  but  an 
expression  of  ignorance,  and  decreases  with  the  progress  of 
science.  It  may  be  said  that  the  chief  progress  now  being 
made  industrially  consists  in  lifting  the  veil  which  hides 
the  future.  The  countless  trade  journals  now  in  use  have 
their  special  reason  for  existence  in  enabling  their  readers 
better  to  forecast  the  future,  by  supplying  them  with  data 
as  to  past  and  present  conditions,  as  well  as  by  instructing 
them  in  the  relations  of  cause  and  effect.  The  govern- 
ment reports  of  crops,  the  technical  schools  and  agricul- 
tural colleges,  all  tend  in  the  same  direction.  Whereas 
formerly  the  mine  prospector  could  only  guess  wildly  at 
the  ore  "in  sight"  and  the  time  and  cost  required  to  mine 
it,  the  graduate  of  mining  schools  is  now  able,  through 
knowledge  of  geology  and  metallurgy,  to  bring  these  fore- 
casts into  some  degree  of  scientific  accuracy.  And, 
whereas  until  recently  farming  was  one  of  the  most  uncer- 
tain of  occupations,  it  is  to-day  —  thanks  to  modern  scien- 
tific agriculture  —  almost  if  not  quite  as  amenable  to 
prediction  as  industry  or  commerce. 

We  come  now  to  that  important  means  of  avoiding  and 
shifting  risks,  called  insurance.  Insurance  involves  the 
offsetting  of  one  risk  by  another;  that  is,  the_cpnsolidatioji 
of  changes  whereby 


^ 

js,asit  jwere,  manufactured  out  of  uncertainty.  To  illus- 
trate this,  let  us  suppose  that  10,000  houses  of  the  same 
kind  are  too  distant  from  each  other  to  be  destroyed  by 
the  same  fire,  and  let  us  suppose  that  these  houses  in  the 
average  would  be  worth  $10,000  each  were  it  not  for  the 
risk  of  fire;  in  other  words,  that  $10,000  is  the  capitalized 
value  of  the  services  to  be  rendered  by  each  house,  assum- 


ELIMINATION  OF  RISK  5 

ing  that  it  lives  out  its  natural  life.  The  value  of  the  total 
number  of  houses  would  then  be  $100,000,000.  This  is 
the  "riskless  value."  It  is  the  capitalized  value  of  the  in- 
come which  the  10,000  houses  would  bring  in,  were  there 
no  loss  by  fire.  If  interest  is  at  5  per  cent.,  the  income 
which  is  thus  capitalized  is  $5,000,000  a  year.  If  now  we 
suppose  that  the  annual  risk  of  fire  is  one  chance  in  200, 
there  will  be  about  50  houses  annually  burned.  Reckon- 
ing the  value  thus  destroyed  at  an  average  of  $10,000  for 
each  house,  there  will  be  $500,000  annually  lost  by  fire. 
We  must  now  deduct  this  from  the  $5,000,000,  which 
would  be  the  income  were  it  not  for  fires.  We  have  left 
$4,500,000,  the  capitalization  of  which  is  only  $90,000,000. 
In  other  words,  the  total  property  of  10,000  houses  is 
worth  in  "mathematical  value"  $90,000,000  instead  of 
$100,000,000,  the  reduction  being  because  of  the  prospect 
of  fires.  If  we  suppose  all  of  these  houses  to  be  owned  by 
one  corporation,  this  mathematical  value  of  $90,000,000 
might  also  be  the  actual  value,  for  such  a  corporation 
could  count  on  about  50  houses  burning  annually  almost 
as  a  certainty.  Each  house  would  then  be  worth,  on  an 
average,  $9000.  But  if  such  an  individual  house  is  owned 
by  an  individual  person,  this  mathematical  value  would 
not  be  its  "commercial  value,"  on  account  of  the  element 
of  caution.  Let  us  say  that  the  caution  coefficient  is  £, 
in  which  case  the  house  would  be  worth  $7000.  In  other 
words,  we  have  $10,000  as  the  "riskless"  value  of  the 
house,  $9000  as  its  "mathematical"  value,  and  $7000  as 
its  actual  "commercial"  value,  assuming  that  there  is  not 
as  yet  insurance.  Now  if  the  owner  of  such  a  house  could 
secure  insurance  on  a  purely  mathematical  basis  of  the 
risk,  which,  as  we  have  seen,  is  one-half  of  one  per  cent., 
and,  therefore,  could  pay  only  $50  per  annum,  in  con- 
sideration of  which  the  value  of  his  house,  if  destroyed  by 
fire,  is  restored  to  him,  it  is  evident  that  he  has  made  a 
good  investment;  for  he  is  now  assured  of  a  house  even 
should  a  fire  occur,  and  he  has,  instead  of  the  risk  of  fire, 


6  YALE  READINGS  IN  INSURANCE 

merely  to  pay  his  annual  premium  of  $50  a  year,  the  capi- 
talized value  of  which  is  $1000.  Consequently,  his  house 
is  worth  $10,000  —  $1000,  or  $9000. 

Such  an  insurance  rate,  however,  being  based  on  the 
mathematical  or  "pure"  premiums,  would  not  pay  any 
profit  to  the  companies  conducting  it.  But  even  a  higher 
insurance  would  leave  a  large  margin  of  capital-value  saved 
to  the  insured.  If  we  suppose  a  "loading,"  so  that  the 
insurance  premium  is  not  $50  but  $100,  similar  reasoning 
would  show  that  the  value  of  the  house  when  insured 
would  be  to  the  owner  $8000  instead  of  $7000.  As  long 
as  the  loading  is  not  sufficient  to  absorb  all  the  margin 
between  the  $7000  and  $9000,  it  will  be  advantageous  to 
insure. 

Between  the  case  of  a  man  owning  an  individual  house, 
when  the  element  of  caution  would  have  a  large  influence, 
and  that  where  10,000  houses  are  owned  by  the  same  cor- 
poration, in  which  case  the  caution  element  is  almost 
entirely  absent,  there  are  numberless  intervening  cases. 
The  larger  the  number  of  houses  owned  by  one  individual 
or  corporation,  the  less  profitable  becomes  insurance.  To 
express  it  in  the  language  of  the  business  man,  the  various 
risks  insure  each  other.  Thus,  the  North  German  Lloyd 
Company  finds  it  profitable  not  to  insure  its  vessels  against 
shipwreck,  because  they  have  so  large  a  fleet  that  their 
losses  through  a  period  of  time  can  be  counted  on  fairly 
well  in  advance. 

One  effect  of  insurance  on  the  individual  is  to  steady 
the  income  from  his  property.  The  owner  of  the  house  in 
question  would  receive,  if  it  were  not  insured,  a  net  annual 
income,  after  providing  for  depreciation,  of  5  per  cent,  on 
$10,000,  or  $500  a  year  until  the  house  was  burned,  after 
which  he  would  receive  nothing;  whereas,  if  he  insures,  he 
receives  this  $500  income  less  his  premium  up  to  the  date 
of  the  fire,  and  afterward  the  income  from  the  indemnity 
paid  him  by  the  company. 

The  same  principles  apply  to  other  forms  of  insurance, 


ELIMINATION  OF  RISK  7 

as  marine  insurance,  which,  by  consolidating  in  an  in- 
surance company  the  risk  on  a  large  number  of  vessels, 
reduces  for  the  individual  even  the  perils  of  the  sea  to 
relative  certainty  and  regularity;  or  as  steam  boiler  insur- 
ance, which  in  a  similar  manner  treats  the  risk  of  explo- 
sion; or  as  plate-glass  insurance,  burglar  insurance,  live 
stock  insurance,  hail  and  cyclone  insurance,  fidelity  in- 
surance, accident  insurance,  employer's  liability  insurance, 
and,  above  all,  life  insurance.  This  form  of  insurance, 
like  the  other  forms,  tends  to  steady  the  income  of  the 
beneficiary.  If  a  wife  holds  insurance  on  her  husband's 
life,  the  consequence  is  that,  although  what  he  gives  her 
during  his  life  is  somewhat  diminished,  her  income  will 
not  suddenly  cease  at  his  death.  The  tendency  of  insur- 
ance here  as  elsewhere  is  to  make  regularity  out  of  irregu- 
larity, relative  certainty  out  of  relative  uncertainty;  and 
where,  under  the  form  of  insurance  contracts,  the  opposite 
result  follows,  the  case  is  not  one  of  true  insurance,  but 
tends  to  become  one  of  gambling.  Thus,  if  a  person 
insures  the  life  of  some  one  in  whom  he  has  no  financial 
interest,  he  is  merely  gambling  on  that  person's  life. 
Some  years  ago  in  Michigan  there  was  an  abuse  of  this 
type  called  "graveyard  insurance."  Speculators  went 
through  the  form  of  insuring  the  lives  of  certain  old  per- 
sons, in  other  words,  of  betting  on  their  deaths,  a  procedure 
not  only  vicious  as  gambling,  but  calculated  also  to  lead 
to  crime.  The  same  considerations  apply  to  fire  insurance, 
where  a  person  insures  a  building  in  which  he  is  not  finan- 
cially interested,  or  over-insures  one  in  which  he  is.1 

The  range  to  which  insurance  can  apply  is  always 
limited;  but  it  is  constantly  being  extended,  as  business 
men  learn  how  to  bring  risks  of  any  kind  on  to  a  statistical 
basis  and  to  apply  the  theory  of  probability.  At  present 
the  total  assets  of  life  insurance  companies  alone  in  the 
United  States  are  nearly  $3,000,000,000. 

1  For  the  moral  effects  of  insurance,  see  "Insurance  and  Crime," 
by  A.  C.  Campbell,  Putnam's,  1902. 


8  YALE  READINGS  IN  INSURANCE 

Where  risks  cannot  be  reduced  to  a  statistical  basis, 
and  therefore  cannot  be  insured  against,  recourse  is  often 
had  to  the  shifting  of  the  risk  into  the  hands  of  those  who 
are  willing  to  take  it.  Such  persons  are  speculators.  A 
speculator  is  usually  one  in  whom  the  caution  factor  is 
not  so  pronounced  as  in  the  ordinary  individual.  In  ex- 
treme cases  he  tends  to  become  a  simple  gambler.  The 
distinction  between  a  speculator  and  a  gambler,  however, 
is  usually  fairly  well  marked.  A  gambler  seeks  and  makes 
risks  which  it  is  not  necessary  to  assume,  whereas  the 
speculator  is  one  who  merely  volunteers  to  assume  those 
risks  of  business  which  must  inevitably  fall  somewhere. 
A  speculator  is  also  usually  fitted  for  his  work  by  special 
knowledge,  so  that  the  risk  to  him,  owing  to  superior  fore- 
sight, is  at  the  outset  less  than  it  would  be  to  others.  The 
indiscriminate  prejudice  against  all  speculation,  which  is 
so  often  met  with,  is  beside  the  point;  for,  were  there  no 
speculators,  the  same  risks  would  have  to  be  borne  by 
those  less  fitted  to  bear  them.  The  chief  evils  of  specula- 
tion flow  from  the  participation  of  the  general  public,  who 
lack  the  special  knowledge,  and  enter  the  market  in  a 
purely  gambling  spirit.  In  addition  to  suffering  the  usual 
evil  consequences  of  gambling,  they  produce  evil  con- 
sequences for  the  non-participating  public  by  causing 
factitious  fluctuations  in  the  values  of  the  products  or 
property  in  which  they  speculate. 

The  evils  of  speculation  are  particularly  acute  when, 
as  generally  happens  with  the  investing  public,  the  fore- 
casts are  not  made  independently.  Were  it  true  that  each 
individual  speculator  made  up  his  mind  independently 
of  every  other  as  to  the  future  course  of  events,  the  errors 
of  some  would  probably  be  offset  by  those  of  others. 
But,  as  a  matter  of  fact,  the  mistakes  of  the  common  herd 
are  usually  in  the  same  direction.  Like  sheep,  they  all 
follow  a  single  leader.  How  easily  they  are  led  is  shown 
by  the  effect  on  the  stock  market  in  the  year  1904,  when 
Thomas  Lawson  published  scare-head  advertisements 


ELIMINATION  OF  RISK  9 

in  the  newspapers  advising  the  public   to   sell   certain 
securities. 

A  chief  cause  of  crises,  panics,  runs  on  banks,  etc.,  is 
that  risks  are  not  independently  reckoned,  but  are  a  mere 
matter  of  imitation.  A  crisis  is  a  time  of  general  and 
forced  liquidation.1  In  other  words,  it  differs  from  any 
other  period  in  two  particulars,  viz.,  that  the  liquidations 
are  more  numerous,  and  that  they  are  for  the  most  part 
forced  upon  the  debtors  by  the  creditors  because  of  threat- 
ened or  actual  bankruptcy.  Neither  of  these  conditions 
could  exist  unless  there  had  been  at  a  prior  time  a  general 
miscalculation  of  the  future.  Both  creditors  and  debtors 
must  have  made  a  wrong  forecast  when  their  ill-fated 
agreements  were  entered  into.  Hence  a  crisis  is  the 
penalty  which  must  be  paid  when  a  previous  general  error 
in  prediction  is  discovered.  Such  a  general  error  may  be 
due  to  the  coincidence  of  a  number  of  independent  mis- 
takes of  individuals;  but  it  almost  always  is  due  to  lack 
of  independence,  —  to  the  principle  of  imitation.  The 
error,  whatever  it  is,  when  committed  by  a  person  of  in- 
fluence, is  like  an  infection;  it  is  caught  by  hundreds  of 
others  and  transmitted  to  thousands.  A  great  mob  of 
easily  led  investors,  eagerly  searching  for  "straight  tips" 
which  may  bring  instant  wealth,  make  their  mistake  in 
common,  and  when  the  mistake  is  disastrous  they  try,  en 
masse,  to  escape.  A  sudden  rush  of  all  the  passengers  on 
a  ferry-boat  to  one  side  will  produce  a  "list"  in  the  boat's 
position,  and  sometimes  cause  it  to  capsize,  though  the 
independent  movement  of  the  individual  passengers  will 
seldom  or  never  produce  disaster.  So  also  the  sudden 
general  realization  of  unforeseen  danger  on  the  part  of  the 
investing  public  may  submerge  the  craft  of  credit  and 
those  whom  it  has  hitherto  borne  along  in  safety.  In 
short,  a  general  crisis  bears  the  relation  to  individual 
bankruptcies  which  a  general  conflagration  bears  to 

1  See  Juglar,  "Des  Crises  Commerciales,"  Paris,  2d  edition,  1889, 
Chap.  I. 


10  YALE  READINGS  IN  INSURANCE 

individual  fires.  The  key  to  the  study  of  either  crises 
or  conflagrations  is  the  existence,  in  place  of  independent 
hazards,  of  interdependent  ones.  So  far  as  conflagrations 
are  concerned,  the  principle  of  interdependence  is  dis- 
tinctly recognized  by  students  of  fire  insurance,  and  in 
consequence  each  company  strives  to  keep  its  own  fire 
risks  independent  of  each  other,  by  not  having  too  many 
in  the  same  locality;  but  so  far  as  crises  are  concerned,  the 
principle  has  not  yet  been  sufficiently  emphasized  by 
students  of  economic  history. 

The  same  principle  applies  to  the  phenomenon  of  a  run 
on  a  bank.  The  opinions  of  the  bank's  solvency  are  not 
formed  independently  but  interdependently.  A  year  or 
more  ago  the  newspapers  reported  that,  a  policeman  and 
a  crowd  of  people  being  collected  on  the  steps  of  one  of 
the  Wilkes-Barre  savings  banks  to  escape  the  rain,  two 
Hungarian  depositors  who  were  passing  jumped  to  the 
conclusion  that  the  bank  had  been  attacked  by  burglars, 
and  circulated  the  disturbing  news  in  the  Hungarian 
colony,  with  the  result  that  when  the  bank  opened  for 
business  many  depositors  made  a  run  upon  it. 

We  see,  then,  that  where  speculation  is  imitative,  it  is 
dangerous  alike  to  those  who  engage  in  it  and  to  the  pub- 
lic. Where,  on  the  other  hand,  speculation  is  based  on 
independent  knowledge,  its  utility  is  usually  enormous. 
It  operates  both  to  reduce  risk  by  means  of  utilizing  the 
special  knowledge  of  speculators,  and  also  to  shift  risk 
from  those  who  lack  this  knowledge  to  those  who  possess 
it.  The  consequence  is  that  normally  speculative  prop- 
erty will  gravitate  into  the  hands  of  those  most  able  to 
forecast  its  true  income. 

Modern  production  has  been  called  capitalistic-specu- 
lative production,  owing  to  the  fact  that  it  is  managed  by 
"captains  of  industry,"  who  are  specially  fitted  at  once  to 
forecast  and  to  mold  the  future  within  the  special  realms 
in  which  they  operate.  The  industries  of  transportation 
and  manufacturing  particularly  are  under  the  lead  of  an 


ELIMINATION  OF  RISK  11 

educated  and  trained  speculative  class,  whose  function 
it  is  to  assume  for  themselves  the  main  risks,  and  leave 
the  ordinary  investor,  who  is  not  so  equipped,  to  cooperate 
as  a  mere  "lender"  or  silent  partner.  Yet  it  often  happens 
that  they  betray  the  confidence  placed  in  them,  and  con- 
tinue to  throw  the  burden  of  risk  on  those  whom  they 
pretend  to  shield. 

In  the  special  field  more  usually  known  as  "specula- 
tive," —  namely,  that  in  which  attempts  are  made  to 
forecast  prices  in  the  great  exchange  markets,  —  we  find 
a  similar  class  who  are  specially  trained.  These  specula- 
tors are  either  "bulls"  or  "bears";  that  is,  they  speculate 
either  for  a  rise  or  a  fall.  Those  who  believe  that  wheat 
or  any  other  article  is  likely  to  rise  in  value  and  hence 
yield  more  than  the  "rate  of  interest,"  will  hold  it,  or  if 
they  do  not  own  it,  will  buy  it  or  obtain  an  option  on  it. 
Such  an  option  is  known  as  a  "call,"  and  is  put  in  force 
at  a  later  time,  at  a  price  fixed  in  advance  and  considered 
low.  On  the  other  hand,  those  who  believe  that  prices 
will  fall  will  sell  out  their  present  holdings,  or  may  sell 
"short,"  agreeing  to  supply  such  holdings  at  a  later  time 
at  a  fixed  price  which  they  consider  high.  Such  a  contract 
to  sell  is  often  made  in  the  form  of  an  option,  in  which 
case  it  is  known  as  a  "put." 

To  show  how  such  contracts  will  shift  risks,  a  few  ex- 
amples will  suffice.  A  building  contractor  who  had  taken 
a  large  contract  was  asked  if  he  were  not  taking  large 
risks,  since  he  could  not  foreknow  the  cost  of  building. 
He  replied,  "No,  I  am  taking  no  risks  at  all  except  on 
'labor';  I  have  made  contracts  to  be  supplied  with  all 
materials  when  needed,  at  fixed  prices."  Those  who  made 
these  contracts  thus  assumed  the  risk  of  fluctuation  in 
price  in  the  special  materials  in  which  they  dealt,  relieving 
the  contractor  of  the  necessity  of  informing  himself  of 
the  special  market  conditions  for  stone,  brick,  timber,  etc., 
and  enabling  him  to  make  a  closer  bid  for  the  contract, 
inasmuch  as  there  was  less  need  of  the  element  of  caution. 


12  YALE  READINGS  IN  INSURANCE 

The  public,  of  course,  get  the  benefit  of  such  a  shifting 
of  risk  in  the  form  of  reduced  cost  of  building.  Similar 
results  follow  from  most  other  "short"  sales.  Again,  a 
woolen  manufacturer  need  not  carry  so  large  a  stock  of 
wool  if  he  can  make  a  contract  by  which  some  one  will 
sell  short,  or  agree  to  supply  the  wool  at  fixed  prices  and 
at  certain  dates.  He  can  afford  to  use  up  his  present 
stock  fearlessly,  with  the  certainty  that  when  it  is  gone  he 
can  obtain  a  new  supply.1  Without  such  a  contract,  he 
would  be  under  the  necessity  of  carrying  a  large  and  idle 
stock. 

An  important  method  of  shifting  risks  is  "hedging," 
whereby  a  dealer,  for  instance  in  transporting  wheat,  may 
be  relieved  of  the  risk  of  a  change  in  price.  He  buys  wheat 
in  the  West  intending  to  ship  it  to  New  York  and  sell  it 
there  at  enough  to  cover  cost  of  transportation  and  a 
small  profit.  In  consequence  of  a  sudden  fall  in  price  he 
might  find  all  his  profit  wiped  out;  or  he  might,  on  the 
other  hand,  by  a  rise  in  price,  make  much  more  than  nor- 
mal profits.  But,  being  of  a  cautious  disposition,  he 
prefers  an  intermediate  course,  —  a  small  profit  which  is 
sure  rather  than  the  chances  of  both  gain  and  loss.  Com- 
sequently  he  "hedges."  He  enters  into  some  speculative 
market,  knowing  that  it  will  move  in  sympathy  with  the 
New  York  market,  and  there  he  "speculates"  for  a  fall, 
or  sells  "short."  In  case  the  price  in  New  York  falls, 
what  he  loses  on  the  wheat  which  he  has  transported  he 
gains  through  his  speculative  short  selling.  Contrariwise, 
if  the  price  rises,  what  he  gains  on  his  wheat  transported 
he  loses  in  the  speculative  market.  In  other  words,  he  is, 
as  it  were,  betting  on  both  sides  of  the  market  at  once, 
and  therefore  eliminating  all  risk,  so  that  he  only  obtains 
his  normal  profit,  commission,  or  percentage  on  the  actual 
wheat  handled,  having  imposed  the  burden  of  risk  of  specu- 
lation on  the  speculative  dealers  to  whom  he  sold  short.2 

»Cf.  Hadley,  "Economics,"  Putnam's,  1896,  p.  106. 

3  See  "Speculations  on  Stock  and  Produce  Exchanges  of  the  United 


ELIMINATION  OF  RISK  13 

The  effect  of  hedging  on  those  who  engage  in  it,  such 
as  the  wheat  dealers,  is  evidently  to  enable  them  to  work 
on  a  smaller  margin  of  profit.  In  consequence  the  public 
receives  a  benefit  in  lowered  prices.  The  case  is  thus  very 
similar  to  those  respectively  of  the  builder  and  of  the  woolen 
manufacturer.  Short  selling,  binding  the  future  to  the 
past,  enables  the  specialist  to  guarantee  to  the  general 
public  a  definite  foreseen  series  of  events.  The  beneficial 
effect  to  the  public,  in  saving  useless  stocks  and  reserves, 
in  producing  more  intelligent  direction  of  enterprises,  and 
in  encouraging  accumulation  through  greater  certainty 
of  its  future  benefits,  is  both  obvious  and  great.  Risk  is 
one  of  the  direst  economic  evils,  and  all  of  the  devices 
which  aid  in  overcoming  it  —  whether  increased  guaran- 
ties, safeguards,  foresight,  insurance,  or  legitimate  specu- 
lation —  represent  a  great  boon  to  humanity. 

States,"  by  Henry  C.  Emery,  Publications  of  American  Economic 
Association.  For  the  development  of  insurance  speculation  in  Eng- 
land, see  "The  Put  and  Call,"  by  L.  R.  Higgins,  London,  Effingham 
Wilson,  1902. 


CHAPTER  II 

FUNCTION   OF   LIFE   INSURANCE  l 

EACH  family  requires  for  its  subsistence  a  certain  sum 
of  money,  which  varies,  both  as  to  its  amount  and  the 
length  of  time  during  which  it  will  be  needed,  according 
to  the  circumstances  which  surround  each  individual 
case.  This  income  is,  in  some  cases,  derived  from  invested 
funds  inherited  or  accumulated,  but,  in  general,  it  repre- 
sents the  earnings  of  that  one  upon  whom  rests  the  re- 
sponsibility of  supporting  the  various  individuals  who 
have  the  right  to  look  to  him  for  maintenance. 

The  relations  between  life  insurance  and  the  family 
spring  from  this  state  of  affairs,  and  depend  upon  the 
value  which  one  human  life  has  to  another.  To  under- 
stand clearly  how  this  may  be  ascertained,  it  will  be  useful 
to  consider  the  rules  which  govern  the  worth  of  some 
varieties  of  property. 

In  the  analysis  of  the  question  under  consideration,  it 
will  be  assumed  that  the  security  underlying  the  evidence 
of  indebtedness  is  abundant  and  not  regarded  with  doubt. 

The  simplest  form  of  invested  funds  is,  perhaps,  a  note 
or  other  form  of  obligation,  the  payment  of  which  may  be 
at  any  time  demanded  by  the  lender  or  made  by  the 
borrower.  The  value  of  this  is  always  the  amount  it 
represents,  for  if  the  current  rate  of  interest  rises  above 
the  rate  which  has  been  agreed  upon,  the  lender  will  de- 
mand his  principal  in  order  that  he  may  put  his  money  to 

1  By  John  M.  Holcombe,  President  of  the  Phosnix  Mutual  Life 
Insurance  Company,  Hartford.  Reprinted  from  pages  26-53  of  the 
"Yale  Insurance  Lectures,  Life." 

14 


FUNCTION   OF  LIFE  INSURANCE  15 

more  profitable  use.  If,  on  the  other  hand,  the  ruling 
rate  falls  below  that  stipulated  for,  the  borrower  will  pay 
his  obligation  and  secure  his  money  on  more  favorable 
terms. 

The  present  value  of  a  bond  running  for  a  stated  term 
of  years,  and  bearing  a  fixed  rate  of  interest,  is  a  kind  of 
property  into  which  another  element  is  introduced  and 
which  will  serve  to  show  the  controlling  force  which  in- 
terest exerts  in  all  valuations.  The  price  of  such  a  bond 
will  depend  upon  the  rate  of  interest  which  it  bears  com- 
pared with  the  current  rate  which  can  be  obtained  by 
investors,  and  which,  therefore,  must  be  satisfactory  to 
them. 

If  the  rate  provided  for  is  greater  than  the  market  rate, 
the  value  of  the  bond  will  be  greater  than  its  face  value, 
but  will  decrease  as  it  approaches  maturity,  at  which  time 
only  the  face  value  will  be  payable.  If,  on  the  other 
hand,  the  stipulated  rate  is  less  than  that  current,  the 
value  will  be  less  than  the  face,  but  will  increase  up  to  the 
time  when  the  full  obligation  will  be  payable. 

If  the  rate  coincides  with  the  market,  the  value  will 
coincide  with  the  amount  of  the  bond. 

If  the  current  rate  of  interest  changes,  the  value  will 
change  accordingly. 

In  valuing  lands,  still  other  elements  must  be  intro- 
duced, although  the  interest  question  still  exerts  a  force 
which,  on  the  whole,  is  controlling. 

Adam  Smith  in  his  "Wealth  of  Nations,"  published  in 
1776,  remarks:  "The  ordinary  market  price  of  land,  it  is 
to  be  observed,  depends  everywhere  upon  the  ordinary 
market  rate  of  interest.  The  person  who  has  a  capital 
from  which  he  wishes  to  derive  a  revenue,  without  taking 
the  trouble  to  employ  it  himself,  deliberates  whether  he 
should  buy  land  with  it  or  lend  it  out  at  interest.  The 
superior  security  of  land,  together  with  some  other 
advantages,  which  almost  everywhere  attend  upon  this 
species  of  property,  will  generally  dispose  him  to  content 


16  YALE  READINGS  IN  INSURANCE 

himself  with  a  smaller  revenue  from  land  than  what  he 
might  have  by  lending  out  his  money  at  interest.  These 
advantages  are  sufficient  to  compensate  a  certain  differ- 
ence of  revenue;  but  they  will  compensate  a  certain  dif- 
ference only;  and  if  the  rent  of  land  should  fall  short  of 
the  interest  of  money  by  a  greater  difference,  nobody 
would  buy  land,  which  would  soon  reduce  its  ordinary 
price.  On  the  contrary,  if  the  advantages  should  much 
more  than  compensate  the  difference,  everybody  would 
buy  land,  which  again  would  soon  raise  its  ordinary  price. 
When  interest  was  at  10  per  cent.,  land  was  commonly 
sold  for  ten  and  twelve  years'  purchase.  As  interest  sunk 
to  6,  5,  and  4  per  cent.,  the  price  of  land  rose  to  twenty, 
five-and-twenty,  and  thirty  years'  purchase.  The  market 
rate  of  interest  is  higher  in  France  than  in  England;  and 
the  common  price  of  land  is  lower.  In  England  it  com- 
monly sells  at  thirty,  in  France  at  twenty  years'  purchase." 

In  modern  times  this  rule  seems  to  hold  good.  In 
thirteen  counties  in  the  States  of  Iowa,  Illinois,  Missouri, 
Nebraska,  and  Kansas,  there  are  now  on  record  appraisals 
of  farming  lands  made  in  1876,  showing  an  average  of  $20 
per  acre.  At  that  time  money  was  loaned  on  these  lands 
at  10  per  cent.  In  1903  lands  in  these  same  counties  were 
appraised  at  an  average  of  $39.60  per  acre,  while  loans 
were  made  at  about  5  per  cent. 

In  the  varieties  of  property  thus  far  considered,  there 
will  be  found  to  be  lacking  certain  elements  which  produce 
chances  of  change  and  deterioration,  which  must  be  com- 
bined with  interest  in  valuing  other  classes  of  property. 
A  lot  in  the  center  of  a  city  has  no  value  of  its  own,  and 
can  only  be  made  income-producing  by  the  erection  upon 
it  of  a  building  for  the  use  of  which  a  rental  will  be  paid. 
There  are  many  circumstances  which  must  now  be  con- 
sidered in  determining  the  worth  of  this  property.  If  it  is 
composed  of  or  surrounded  by  inflammable  materials,  its 
value  will  be  unfavorably  affected.  It  is  true  that  the 
owner  can  protect  himself  against  loss  by  fire  by  a  policy 


FUNCTION  OF  LIFE  INSURANCE  17 

of  insurance,  but  he  must  pay  for  this  protection  his  full 
share  of  the  risk,  which  will  be  accurately  estimated,  and 
the  value  which  the  building  would  have,  were  it  not  for 
this  hazard,  will  be  diminished  by  just  the  chance  of  that 
contingency.  The  present  condition  of  the  structure, 
viewed  in  the  light  of  natural  decay  and  its  adaptability  to 
the  needs  of  the  location  and  times,  will  demand  intelli- 
gent discrimination.  The  amount,  therefore,  which  an 
investor  will  pay  for  the  block  will  be  determined  by  his 
knowledge  of  what  it  now  produces,  and  his  estimate  both 
of  what  it  will  yield  in  the  future  and  the  time  when, 
either  by  gradual  deterioration  or  by  sudden  accident, 
it  will  become  unable  to  afford  an  income.  If  there  can 
be  obtained  from  it  more  than  will  suffice  to  meet  necessary 
expenditures,  then  the  property  has  an  actual  value 
which  will  vary  according  to  the  estimate  that  may  be 
made  of  its  future,  always  controlled  by  the  current  rate 
of  interest  which  can  be  obtained  on  investments. 

That  neighborhood  which  to-day  attracts  business  by 
the  elegance  of  its  buildings,  or  its  nearness  to  lines  of 
travel  or  transportation,  may  to-morrow  be  swept  by  fire 
or  damaged  by  changes  in  modes  of  conveyance.  No 
human  foresight  can  provide  with  certainty  for  these  con- 
tingencies, but  the  general  future  of  a  section  is  estimated 
by  the  careful  student  of  the  laws  underlying  commercial 
transactions,  with  an  accuracy  which,  on  the  whole, 
enables  him  to  reap  the  profits  that  legitimately  belong  to 
high  intelligence.  In  the  change  of  ownership,  the  pur- 
chaser thinks  that  he  is  receiving  more  than  an  equivalent 
for  his  money;  else  he  would  not  buy.  The  seller  differs 
as  to  the  probable  future,  and  believes  that  what  he  now 
receives  will  be  of  greater  value;  otherwise  he  would  retain 
his  possession.  The  result  in  almost  any  particular  trans- 
action will  show  that  one  or  the  other  has  erred  in  his 
estimate,  but  on  the  whole,  real  estate  or  any  other  prop- 
erty which  is  valued  for  its  income  will  be  found  to  con- 
form to  the  general  law  which  governs  the  value  of  money. 


YALE  READINGS  IN  INSURANCE 

Repairs  and  alterations  may  be  made  which  will  check 
decay  or  even  increase  productiveness,  but  each  change 
will  call  for  a  new  expenditure  which  will  not  prevent  the 
decline  in  the  value  of  the  original  investment. 

Having  considered  the  elements  which  enter  into  the 
value  of  certain  kinds  of  property,  it  can  now  be  inquired 
whether  a  human  life  can  have  a  definite  worth  which  can 
be  measured  with  any  degree  of  accuracy.  It  would  not 
be  difficult  to  enumerate  many  lives  which  cannot  be 
considered  of  any  pecuniary  value,  because,  for  various 
reasons,  they  produce  nothing.  Such  are  those  of  the  very 
old,  the  imbeciles,  and  the  confirmed  invalids.  But  the 
life  of  every  man  who  earns  more  than  suffices  for  his 
actual  personal  expenses  is  of  pecuniary  value  to  some  one 
besides  himself.  This  has  been  recognized  from  early 
times  in  the  institution  of  slavery,  which  was  based  on 
the  principle  that  the  ownership  of  the  services  of  a  human 
being  had  a  value  in  accordance  with  the  excess  of  earnings 
obtainable  above  the  necessary  cost  of  subsistence.  When 
a  slave  was  purchased  as  an  investment,  he  was  examined 
in  order  that  the  state  of  his  health  and  his  muscular 
development  might  be  known.  These  qualities,  in  con- 
nection with  his  age,  his  skill  in  any  variety  of  labor,  and 
his  disposition,  determined  the  price  at  which  he  seemed 
likely  to  be  a  profitable  investment.  A  carpenter  or 
blacksmith  was  worth  50  per  cent,  more,  other  things  being 
equal,  than  an  ordinary  field  hand,  because,  while  the  cost 
of  his  support  was  no  greater,  the  quality  of  his  service 
was  much  more  valuable.  In  any  case,  however,  certain 
important  elements  were  either  wholly  lacking  or  but 
partially  developed.  "A  person  who  can  acquire  no 
property  can  have  no  other  interest  but  to  eat  as  much 
and  to  labor  as  little  as  possible." 

Family  ties  are  needed  to  develop  the  highest  value  of  a 
human  life.  But  while  this  value  thus  reaches  its  greatest 
capacity,  there  devolves  upon  its  possessor  the  respon- 
sibility of  supporting  those  who  have  by  his  own  choice 


FUNCTION  OF  LIFE  INSURANCE  19 

and  act  the  right  to  depend  upon  him  for  the  necessities 
of  life.  The  family,  then,  has  a  clear  and  indisputable 
interest  in  his  earnings.  This  they  have  day  by  day, 
month  by  month,  and  year  by  year.  If  he  dies  possessed 
of  property,  this  by  right  goes  to  them,  in  order  that  they 
may,  so  far  as  its  income  may  enable  them,  continue  to 
defray  the  cost  of  existence. 

But  what  of  the  life  itself?  Has  it  a  value  beyond 
what  it  produces  in  a  month  or  a  year  which  can  be  meas- 
ured with  any  degree  of  accuracy?  Supposing  its  posses- 
sor to  be  of  good  constitution  and  free  from  hereditary 
taint,  it  has  already  been  shown  that  he  and  others  of  his 
class  will  be  governed,  as  to  the  length  of  their  «ves,  by  a 
law  of  mortality  so  certain  that  their  average  lifetime 
may  be  measured  with  as  much  precision  as  that  which 
governs  any  series  of  future  events.  For  example,  a  man 
is  thirty  years  old,  in  good  health,  and  his  surplus  earnings 
are  $1500  a  year,  and  money  is  worth  4  per  cent,  per 
annum;  by  a  standard  mortality  table,  the  present  value 
of  the  future  surplus  earnings  of  this  life  is  $25,560.  It  is 
true  that  this  value  is  based  on  averages,  and  that  the 
assumption  that  he  will,  through  his  life,  receive  and 
spend  just  the  amounts  here  set  down  will  not  probably 
be  realized.  It  is  well-nigh  certain  that  his  death  will 
occur  either  before  or  after  the  date  expected.  Disease  or 
accident  may  rob  him  permanently  of  his  productive 
power.  Circumstances  which  no  skill  guided  by  research 
can  calculate,  and  no  judgment  foretell,  may  change  the 
current  of  his  life,  and  enhance  or  diminish  the  value  of 
his  efforts.  And  yet  this  value  rests  upon  a  foundation 
composed  of  elements  no  more  uncertain  than  those  which 
determine  the  worth  of  the  business  block.  Both  the 
building  and  the  life  are  constantly  exposed  to  the  danger 
of  destruction,  but  the  chance  can  be  measured  even  more 
accurately  in  the  latter  case  than  in  the  former. 

The  natural  ability  of  one  man  is  greater  than  that  of 
another,  and  this  advantage  will  be  shown  in  the  value  of 


20  YALE  READINGS  IN  INSURANCE 

their  respective  services.  These  qualities  as  well  as  those 
of  industry  and  perseverance  are  inborn  traits,  and  will, 
considered  in  connection  with  education  and  training, 
determine  the  amount  for  which  their  possessor  can  lease 
his  efforts  to  others  or  employ  them  for  independent 
profit.  What  nature  has  done  for  the  man  may  be  said  to 
correspond  with  the  location  of  the  building.  What  ex- 
perience has  taught  him  is  like  the  quality  of  the  structure. 
In  each  case  there  are  certain  necessary  expenditures 
which  must  be  met  before  any  real  value  can  exist,  and  in 
each  case  the  worth  rests  upon  estimates. 

The  family  which  depends  upon  this  income  has  an 
interest  in  the  life  which  produces  it,  which  is  not  limited 
by  a  month  or  a  year.  It  extends  into  the  future  as  far 
as  they  need  it.  Without  it  they  will  suffer  privation  or 
be  dependent  upon  charity,  in  either  of  which  conditions 
their  natural  protector  has  no  right  to  leave  them.  It  is 
here  that  the  institution  of  life  insurance  performs  the 
service  for  which  it  was  created.  It  renders  immediately 
available  the  future  earnings  of  a  lifetime.  It  takes  the 
place  of  him  whose  duty  it  is  to  care  for  his  dependents 
until  they  can  care  for  themselves. 

The  Federal  Bureau  of  Labor  has  completed  an  extended 
investigation  into  the  cost  of  living  of  workingmen's 
families,  and  the  retail  prices  of  the  principal  staple  articles 
of  food  used  by  such  families.  The  material  for  the  de- 
tailed study  of  the  cost  of  living  consisted  of  the  figures 
of  income  and  expenditures  furnished  by  some  2500 
families  in  thirty-three  states,  although  certain  data  not 
entering  so  much  into  detail  were  gathered  from  25,000 
families.  The  2500  families  furnishing  the  detailed 
material  consisted  on  an  average  of  5.31  persons,  a  figure 
slightly  (0.7)  above  the  average  of  private  families  in  the 
whole  country  as  shown  by  the  census  of  1900.  The 
average  yearly  expenditures  for  all  purposes  was  $768.54 
for  the  year  1901.  Of  this,  43  per  cent,  was  for  food,  13 
per  cent,  for  rent,  14  per  cent,  for  clothing,  and  5  per  cent. 


FUNCTION  OF  LIFE  INSURANCE  21 

for  fuel  and  lighting.  Three-quarters  of  the  expenditures 
was  for  the  actual  necessities  of  ordinary  living,  the  re- 
mainder representing  miscellaneous  expenses,  including 
the  cost  of  education  and  sickness.  If  this  average  family 
is  supported  by  one  person,  his  death  would  diminish  the 
total  family  expenditures  by  some  amount.  It  is  not  un- 
reasonable to  assume  that  the  cost  of  maintaining  the 
remainder  would  be  $500  per  annum.  Assuming  that  he 
is  forty  years  of  age,  and  in  good  health,  and  that  money 
is  worth  4  per  cent,  per  annum,  the  present  value  which  this 
family  has  in  his  life  is  $7546.50.  Human  and  divine 
laws  give  them  the  right  to  the  fruit  of  his  labors.  But 
does  he  perform  his  whole  duty  when  he  furnishes  them 
with  food,  clothing,  and  the  other  necessities  of  life,  or  even 
with  education  suitable  to  their  station?  He  may  live  to 
see  his  children  self-supporting,  and  to  provide  for  the 
old  age  of  himself  and  his  wife,  but  what  if  his  life  shall  be 
cut  off  while  they  are  still  unable  to  earn  their  own  sub- 
sistence? 

Hadley  says:  "Although  society  insists  as  far  as  it  can 
that  each  man  shall  be  responsible  for  himself  and  his 
family,  it  cannot  carry  this  principle  out  to  its  logical  con- 
clusion. We  cannot  kill  off  the  weak  merely  because  they 
have  been  unable  to  support  themselves.  Still  less  can 
we  leave  the  unfortunate  to  die  as  a  result  of  their  inca- 
pacity. The  ethical  loss  to  the  community  which  adopted 
such  a  course  would  indefinitely  outweigh  any  material 
or  physical  gain.  The  independent  and  the  unfortunate 
must  under  certain  conditions  be  taken  care  of  by  society, 
even  though  the  process  of  natural  selection  is  thereby 
hampered." 

Again,  in  discussing  compulsory  insurance  and  pensions, 
he  says:  "There  are  certain  things  which  society  must  do 
in  justice  to  itself,  which  it  cannot  safely  allow  individuals 
to  demand  in  justice  to  themselves.  If  you  give  every 
man  a  right  to  a  pension  when  he  is  incapable  of  self- 
support,  you  tacitly  approve  his  failure  to  provide  for 


22  YALE  READINGS  IN  INSURANCE 

himself  and  his  children.  That  the  necessary  degree  of 
production  and  of  economy  by  the  community  as  a  whole 
would  be  maintained,  if  such  a  point  of  view  were  adopted, 
seems  highly  improbable.  We  need  measures  which  shall 
increase  individual  responsibility  rather  than  diminish 
it;  measures  which  shall  give  us  more  self-reliance  and  less 
reliance  on  society  as  a  whole.  We  cannot  afford  to 
countenance  a  system  of  morals  or  law  which  justifies  the 
individual  in  looking  to  the  community  rather  than  to 
himself  for  support  in  age  or  infirmity." 

It  will  not  be  denied  that  certain  persons  must  and  should 
be  supported  at  the  public  expense,  but  the  fewer  there 
are  of  these,  the  better  will  be  the  morals  as  well  as  the 
finances  of  the  community,  and  life  insurance  is  continu- 
ally reducing  this  dependent  class.  It  is  not  the  man  who 
lives  to  old  age,  supports  and  educates  his  children  and 
saves  a  competency,  who  contributes  to  the  class  who  are 
applicants  for  public  charity.  But  the  one  who  is  taken 
away  while  his  children  are  infants  and  who  has  not  had 
the  time  given  him,  no  matter  how  affectionate  and  thrifty 
he  may  be,  to  provide  for  their  needs,  is  a  liberal  con- 
tributor to  the  orphan  asylum  and  the  almshouse.  He 
may  avoid  this  danger  by  postponing  marriage  for  such 
time  as  will  enable  him  to  accumulate  a  sufficient  sum  to 
insure  the  comfort  of  a  family,  but  neither  morality  nor 
the  public  welfare  will  be  best  served  by  the  establishment 
of  such  a  principle.  There  is  but  one  way  by  which  he 
can  follow  the  course  which  nature  intended  him  to  take, 
and  that  way  is  open  to  him  through  life  insurance.  By 
the  payment  of  comparatively  small  sums  at  convenient 
intervals,  he  can  relieve  himself  of  the  responsibility  of  the 
distress  which  would  fall  upon  his  dependents  in  case  of 
his  premature  death,  and  he  can,  moreover,  provide  for 
his  own  future  in  case  he  should  survive  the  time  when, 
from  physical  weakness,  he  shall  become  incapacitated 
from  earning  his  own  subsistence. 

In  what  directions  and  to  what  extent  life  insurance 


FUNCTION  OF  LIFE  INSURANCE  23 

promotes  the  best  family  life  it  is  difficult  to  prove.  That 
it  tends  to  increase  the  sense  of  responsibility  which  leads 
to  a  thoughtful  appreciation  of  affection  and  duty  cannot 
be  doubted.  That  man  who  enters  upon  his  married  life 
without  consideration  not  alone  of  the  probabilities,  but 
also  of  the  possibilities,  will  find  himself  weighted  with  a 
burden  which  he  cannot  transfer  to  another,  and  which 
will  consist  both  of  the  necessity  of  self-denial  and  anxiety 
for  the  future.  The  first  will  develop  and  improve  his 
character,  will  stimulate  his  ambition  and  increase  his 
efficiency,  but  a  combination  of  the  two  will  dishearten 
and  impede  him  and  tend  to  cruelty,  intemperance,  and 
divorce,  for  he  will  seek  to  transfer  to  others  that  for  which 
he  alone  is  responsible. 

Life  insurance  makes  immediately  available  the  future 
savings  of  a  lifetime,  and  it  is  this  element  of  its  operations 
which  is  its  most  common  and  prominent  characteristic. 
But  its  mission  cannot  be  fully  gauged  without  an  under- 
standing that  it  has  another  feature  less  used  but  not  less 
useful.  It  has  been  shown  that  in  a  large  number  of 
human  beings  belonging  to  a  known  class,  a  law  of  mor- 
tality has  been  found  to  exist,  and  this  has  been  used 
through  life  insurance  to  distribute  among  the  many 
the  unexpected  disasters  which  must  overtake  the  few, 
and  which  would  otherwise  bring  distress,  pauperism,  and 
crime. 

It  is  equally  true  that  out  of  the  many  some  will  survive 
to  old  age,  when  they  will  have  reared  and  educated  their 
children  and  performed  their  whole  duty  toward  them. 
If  a  man  thus  situated  has  been  fortunate  enough  to 
accumulate  property,  the  income  of  which  is  sufficient  to 
maintain  him  independently  of  other  aid,  his  natural 
desire  and  duty  are  to  pass  on  his  possessions  to  his  de- 
scendants, who  will  thus  eventually  secure  his  surplus 
earnings.  But  in  many  cases  he  will  in  his  old  age  find 
himself  alone,  his  duty  done,  his  children  self-supporting 
and  in  the  same  condition  in  which  he  himself  was  in  his 


24  YALE  READINGS  IN  INSURANCE 

youth,  while  the  interest  on  his  savings  will  not  suffice  to 
give  him  that  comfort  and  independence  to  which  he  is 
fairly  entitled. 

Suppose  such  a  man  to  be  seventy-five  years  of  age, 
and  that  he  has  saved  $5000.  If  this  is  invested  at  4  per 
cent,  it  will  yield  him  an  income  of  $200  a  year.  This  will 
not  provide  for  his  needs,  and  he  must  depend  upon 
others  for  a  part  of  his  support  if  he  has  lost  his  earning 
power,  or  he  must,  each  year,  spend  a  part  of  his  principal, 
with  a  possibility  of  living  long  enough  to  exhaust  it  and 
finally  to  become  wholly  dependent.  By  the  operation 
of  the  laws  of  mortality,  life  insurance  can  take  this  amount 
and  give  him  an  income  of  $800  a  year  so  long  as  he  may 
live. 

This  service  also  is  a  distinct  and  important  element  in 
the  family  life.  While  the  responsibility  which  rests  upon 
the  man  with  a  young  and  immature  family  is  definite 
and  unmistakable,  and  may  extend  to  the  end  of  an  old 
age,  involving  the  preservation  and  transmission  of  any 
property  he  may  have,  yet  in  some  cases  independence 
and  happiness  can  only  be  secured  by  obtaining  by  means 
of  life  insurance  the  larger  and  sure  income  which  involves 
the  investment  of  the  principal  for  the  sole  benefit  of  its 
owner. 

The  aged  parent  or  relative  who  is  no  longer  able  to  earn 
a  living,  and  who  has  become  a  charge  upon  a  family 
needing  all  its  resources  for  its  own  members,  is  often  an 
unwelcome  guest,  while  this  same  one  with  an  income 
sufficient  for  his  maintenance  will  be  an  object  of  care 
and  solicitude. 

In  these  ways  does  life  insurance  serve  the  family  in 
guarding  against  the  losses  of  early  death  and  in  providing 
means  to  ameliorate  the  disadvantages  of  old  age.  But 
distributing  the  burden  of  the  few  among  the  many  is  not 
the  only  service  which  this  institution  performs  for  the 
family.  The  contracts  which  it  offers  to  the  public  con- 
tain not  only  the  element  of  protection,  but  of  accumulation 


FUNCTION  OF  LIFE  INSURANCE  25 

as  well.  The  savings  bank  has  its  uses  and  has  played 
an  important  part  in  the  development  of  family  thrift, 
but  the  payment  which  is  called  for  at  stated  times  will 
be  more  likely  to  be  met  than  the  deposit  which  is  required 
only  by  an  indefinite  resolution.  That  the  habit  of  saving, 
especially  if  it  be  for  others,  is  uplifting  and  tends  to 
strengthen  family  ties  does  not  need  demonstration. 

Carroll  D.  Wright  says  that  the  family  "must  be  con- 
sidered as  the  crucial  social  unit  —  'the  very  keystone  of 
society' --for  it  results  from  happy  association  of  the 
sexes  by  which  the  human  species  is  perpetuated  and 
extended,  by  which  the  affections  are  developed,  and  by 
which  the  interest  which  compels  one  unit  to  protect,  pre- 
serve, and  cherish  another  is  fostered.  It  should  be  the 
purpose  of  society,  as  a  whole,  to  protect  the  sacredness 
and  integrity  of  that  relation.  Without  the  family  unit 
no  other  social  units  would  be  possible;  it  brings  the  in- 
dividual out  of  his  seclusion  into  ethical  relations,  con- 
stitutes him  a  living  evolutionary  force,  lifts  him  out  of 
intensive  selfishness  to  a  more  extensive  selfishness,  for 
in  the  family  relation  he  must  live  for  others,  although  in 
living  for  others  he  may  live  for  his  own  higher  enjoyment. 
The  purpose  of  the  individual  unit  in  entering  social  rela- 
tions and  in  inviting  the  force  of  association  is  to  secure 
happiness.  He  may  be  well  fed,  warmed,  and  clothed, 
while  in  the  disintegrated  state  of  the  individual,  but  in 
such  state  he  can  have  no  realization  of  the  happiness 
which  comes  from  appreciation  of  and  service  to  others. 
Hence  the  family  grows  out  of  the  psychic  tendencies  of 
men,  and  is  perhaps  the  best  demonstration  of  the  highest 
aspirations  of  the  individual.  It  is  found  in  every  con- 
dition of  population,  whether  living  in  savagery,  in  bar- 
barous or  in  civilized  communities.  It  is  the  fundamental 
unit  of  civilized  society." 

If  the  family  as  thus  described  be  thoughtfully  con- 
sidered, it  will  be  apparent  that  life  insurance  is  not  only 
an  important  factor  of  this  social  unit,  but  that  it  is  an 


26  YALE  READINGS  IN  INSURANCE 

absolutely  essential  part  of  an  ideal  condition  of  civilized 
life. 

Although  a  policy  of  life  insurance  is  a  contract  between 
an  individual  and  a  corporation  and  directly  concerns  only 
these  two  parties,  yet  the  state  which  gives  being  to  the 
corporation  and  undertakes  to  protect  the  individual  can 
well  be  considered  in  its  relations  to  this,  the  most  far- 
reaching  of  all  forms  of  business  activity. 

Woolsey  defines  a  state  as,  "A  community  of  persons 
living  within  certain  limits  of  territory,  under  a  permanent 
organization  which  aims  to  secure  the  prevalence  of  justice 
by  self-imposed  law." 

It  is  clear  that  any  agency  which  improves  the  mental 
or  moral  attributes,  or  the  material  circumstances  of  any 
one  of  its  citizens,  raises  the  condition  of  the  community 
of  which  he  is  a  member,  and  thus  benefits  the  state. 
Savings  banks  encourage  thrift  and  produce  accumula- 
tions which  would  in  many  cases  be  otherwise  wasted, 
and  thus  they  constitute  a  distinct  and  tangible  benefit 
to  the  state.  Life  insurance  promotes  a  sense  of  respon- 
sibility, strengthens  family  ties,  and  thus  elevates  the 
general  character  of  the  nation.  It  lessens  those  family 
discords  which  end  in  divorce,  it  checks  intemperance, 
and  often  by  its  requirements  brings  a  realizing  sense  of 
the  benefits  of  right  living.  The  very  restrictions  which 
the  companies  transacting  this  business  themselves  place 
upon  admission  to  membership  bring  a  clear  comprehen- 
sion of  the  result  which  temperate  living  has  upon  the 
length  of  life.  Careful  observation  has  shown  that  the 
intemperate  use  of  liquor  weakens  the  human  system, 
rendering  it  less  liable  to  withstand  disease,  and  thus 
shortens  life.  This  is  one  of  the  risks  which  life  insurance 
companies  strive  in  every  way  to  avoid.  Not  only  are 
searching  questions  asked  of  the  applicant  as  to  his  habits 
in  this  respect,  but  reports  are  often  secured  from  inde- 
pendent sources  as  to  his  custom  in  the  use  of  liquor.  It 
is  undoubtedly  the  case  that  many  who  have  thoughtlessly 


FUNCTION  OF  LIFE  INSURANCE  27 

fallen  into  habits  of  intemperate  drinking,  without  realiz- 
ing its  ill  effects,  have,  when  brought  face  to  face  with  the 
requirements  of  life  insurance,  changed  their  modes  of 
life,  and  have  become  not  only  sounder  physically,  but 
improved  in  financial  condition,  and  have  thus  become 
more  valuable  citizens  and  therefore  increased  the  pros- 
perity of  the  state. 

The  physical  examinations  which  are  required  in  all 
cases  of  life  insurance  also  have  their  very  marked  effect 
upon  the  public,  for  until  the  true  meaning  of  life  insurance 
is  brought  home  to  an  applicant,  he  seldom  comes  to  an 
understanding  of  what  the  actual  value  of  his  life  is,  and 
how  much  this  value  is  increased  if  the  length  of  his  life 
can  be  prolonged.  Weaknesses  and  ailments  not  before 
known  are  often  discovered,  and  remedies  are  applied 
which  lengthen  life,  and  thus  add  to  the  aggregate  value 
of  the  state. 

There  can  be  no  doubt,  furthermore,  that  life  insurance 
curtails  the  expense  to  the  public  treasury  of  almshouses 
and  police,  of  criminal  courts  and  prisons,  and  of  the  vari- 
ous other  necessary  branches  of  the  public  service  which 
have  to  do  with  the  prevention  and  punishment  of  crime, 
and  the  relief  of  the  suffering  and  unfortunate. 

Some  years  ago,  a  census  was  taken  of  the  paupers  in  the 
Philadelphia  almshouse,  with  the  result  that  of  the  num- 
ber observed  —  1110  —  only  three  were  found  who  had 
been  beneficiaries  of  life  insurance,  and  these  to  the  extent 
of  $6,000,  but  through  profligacy  or  improvidence  they  were 
reduced  to  a  state  of  pauperism.  In  a  census  of  the  Mont- 
gomery County  (Pa.)  almshouse,  133  were  examined  and 
it  was  found  that  none  of  these  people  or  their  families 
ever  had  been  the  beneficiaries  of  life  insurance. 

In  the  year  1902  there  was  distributed  to  the  holders  of 
life  insurance  policies  and  their  families  in  death  claims, 
matured  endowments,  and  annuities,  by  the  life  insurance 
companies  of  the  United  States,  more  than  $140,000,000. 

It  is  certain  that  in  many  cases  the  proceeds  of  a  life 


28  YALE  READINGS  IN  INSURANCE 

insurance  policy  are  practically  all  that  remain  at  the  death 
of  the  one  responsible  for  the  support  of  helpless  depend- 
ents, and  in  a  vast  number  of  these  cases,  were  it  not  for 
this  aid,  many  persons  would  be  forced  to  accept  public 
charity.  There  can  be  no  doubt  that  an  investigation  of 
the  records  of  the  inmates  of  prisons,  and  of  asylums, 
maintained  at  the  public  expense,  for  the  care  of  those 
made  helpless  by  disease  and  old  age  and  unable  to  care 
for  themselves,  would  show  that  with  rare  exceptions  they 
do  not  belong  to  that  class  from  which  the  membership  of 
life  insurance  companies  has  been  drawn. 

The  limits  of  this  discourse  do  not  permit  an  exhaustive 
analysis  of  the  influence  of  life  insurance  upon  the  com- 
munity, nor  the  benefits  which  it  confers  upon  the  living 
on  the  one  hand  and  upon  dependents  on  the  other.  Some 
other  phases  of  the  subject  are  of  such  importance  as 
to  make  the  study  of  them  interesting  and  useful  to  all 
who  are  engaged  in  business,  professional,  or  political 
life. 

The  state  long  ago  recognized  the  part  played  in  its 
affairs  by  this  institution,  and  the  peculiar  nature  of  its 
service,  by  enacting  laws  to  protect  the  family  in  the  pro- 
ceeds of  life  insurance  policies  as  against  the  claims  of 
creditors.  As  early  as  1840  the  State  of  New  York  passed 
an  act  in  substance  like  the  present  law  in  that  and  other 
states.  It  clearly  indicated  that  the  government  was 
justified  in  the  position  that  the  duty  of  a  man  not  only 
to  support  his  family  during  his  lifetime,  but  also  to  pro- 
vide for  them  after  his  death,  should  take  precedence  of 
all  other  obligations.  This  law  as  it  now  stands  in  the 
statute  book  of  Connecticut  is  as  follows:  "Any  policy 
of  life  insurance  expressed  to  be  for  the  benefit  of  a  married 
woman,  or  assigned  to  her,  or  in  trust  for  her,  shall  inure 
to  her  separate  use;  or  in  case  of  her  decease  before  pay- 
ment, to  the  use  of  her  children,  or  of  her  husband's  chil- 
dren, as  may  be  provided  in  such  policy.  But  if  the  annual 
premium  on  such  policy  shall  exceed  $300,  the  amount 


FUNCTION  OF  LIFE  INSURANCE  29 

of  such  excess,  with  interest,  shall  inure  to  the  benefit  of 
the  creditors  of  the  person  paying  the  premium." 

The  charters  of  some  of  these  companies  contain  similar 
provisions.  In  order  to  make  sure  that  the  protection 
provided  for  by  the  insured  shall  in  any  event,  notwith- 
standing his  own  pecuniary  condition,  reach  those  persons 
who  properly  look  to  him  for  support,  and  without  whose 
protection  might  become  charges  upon  the  public,  the  law 
has  been  invoked  both  in  the  statute  books  and  the  articles 
of  incorporation. 

The  business  of  life  insurance  is  transacted  exclusively 
by  corporations  deriving  their  powers  from  charters 
granted,  in  this  country,  by  the  governments  of  the  various 
states.  An  ordinary  contract  of  insurance  is  a  promise 
to  pay  a  given  sum  at  some  indefinite  future  time,  in  con- 
sideration of  the  present  payment  of  a  certain  other  sum. 
The  peculiar  character  of  this  agreement  makes  possible 
the  practice  of  deceptive  and  unsound  methods,  to  an 
extent  impracticable  in  those  transactions  where  the  pur- 
chaser can  more  readily  examine  and  understand  the  real 
nature  of  the  thing  for  which  he  pays.  It  was  natural, 
therefore,  that  laws  should  be  passed,  intending  to  guard 
the  public  against  the  dishonesty  and  ignorance  of  the 
managers  of  these  institutions  by  requiring  reports  of 
their  affairs  to  be  filed  with  public  officials.  The  State  of 
Massachusetts  in  1807  adopted  a  resolution  requiring 
insurance  companies  to  render  an  account  of  their  affairs  to 
the  next  legislature.  In  1828  an  act  was  passed  requiring 
these  corporations  to  make  annual  statements  to  the 
comptroller,  and  in  1851  this  official  was  given  authority 
to  make  examinations  of  companies. 

Massachusetts  enacted  a  law  in  1854  providing  for  the 
creation  of  an  insurance  department,  which  was  organized 
in  the  following  year  by  the  appointment  of  three  com- 
missioners, whose  duty  it  was  to  examine  the  reports  and 
the  conditions  of  all  companies  doing  business  in  the 
commonwealth.  Other  states  have  followed  the  example 


30  YALE  READINGS  IN  INSURANCE 

set  in  the  East,  as  the  operations  of  these  corporations 
have  become  extended  and  enlarged,  until  now  there  are 
fifty-two  insurance  departments,  including  Alaska,  Porto 
Rico,  and  Hawaii. 

It  is  likely  that  by  reason  of  the  statements  made  public 
through  these  reports,  of  vast  sums  collected  from  the 
people,  a  system  of  taxation  has  grown  up  which  has 
become  a  serious  burden  upon  members  of  these  corpora- 
tions, whose  sole  object  it  is  to  provide  for  future  neces- 
sities. There  was  collected '  in  the  year  1902  from  life 
insurance  companies  for  taxes  more  than  $8,300,000,  by 
far  the  greater  part  of  which  was  the  tax  upon  premium 
receipts.  It  will  not  be  claimed  that  these  institutions 
should  altogether  escape  some  share  of  the  cost  of  main- 
taining the  governments,  yet  it  is  a  question  of  very  great 
public  interest  as  to  what  burden  of  this  kind  should  be 
imposed  upon  this  particular  class  of  institutions.  If  they 
are  performing  the  public  service  which  is  claimed,  the 
levying  of  these  taxes  tends  to  check  the  spread  of  insur- 
ance, by  making  it  more  costly  than  it  otherwise  would  be. 
For  several  years  the  question  of  national  supervision  has 
been  widely  agitated,  and  while  it  is  not  at  all  probable 
that  the  various  states  will  relinquish  all  supervision,  it 
is  certainly  a  fair  question  whether  the  public  good  will 
not  be  served,  if  some  general  supervision  can  be  substi- 
tuted for  a  considerable  part  of  the  present  system,  to  the 
great  saving  of  expense,  without  impairing  the  value  of 
the  present  governmental  inspection. 

An  examination  of  the  items  of  investment  is  interesting 
and  useful  as  indicating  the  influence  which  these  accu- 
mulations undoubtedly  have  upon  the  growth  and  develop- 
ment of  the  country.  The  loans  which  these  companies 
now  hold  upon  real  estate  securities  amount  to  not  less 
than  $600,000,000.  These  investments  have  enabled  the 
owners  of  real  estate  in  cities  to  improve  their  properties 
by  building  dwellings  and  business  blocks,  and  to  increase 
and  extend  every  line  of  business.  For  more  than  thirty 


FUNCTION  OF  LIFE  INSURANCE  31 

years  some  of  the  life  insurance  companies  have  made 
loans  upon  Western  farming  lands.  These  have  enabled 
the  farmers  of  the  country  to  buy  land  and  to  cultivate  it, 
to  erect  necessary  buildings,  to  buy  stock,  and  to  continue 
their  operations  through  unfavorable  years.  It  is  certain 
that  these  institutions  have  been  largely  instrumental  in 
the  growth  of  the  farming  interest.  Lands  in  sections 
where  these  corporations  have  loaned  money  have  very 
greatly  increased  in  value,  largely  by  reason  of  the  reduc- 
tion in  the  rate  of  interest  which  has  come  through  the 
increase  of  these  funds  seeking  investment.  Vast  sums  of 
money  gathered  from  the  payments  of  policy-holders,  and 
held  and  improved  at  interest,  solely  for  the  final  payment 
of  claims,  have  been  used  in  the  development  of  railroads 
and  other  corporations,  and  to  improve  cities  and  towns. 
Deposits  in  banks  have  served  to  aid  commerce  and  have 
been  largely  instrumental  in  enabling  those  engaged  in 
various  lines  of  business  to  procure  funds  on  reasonable 
terms. 

Life  insurance  exists  for  the  purpose  of  repairing  the 
loss  occasioned  by  the  death  of  an  individual  who  can 
produce  more  than  the  cost  of  subsistence.  This  has  been 
shown  in  individual  cases,  and  it  has  also  been  demon- 
strated how  such  value  can  be  reached  in  any  particular 
instance.  In  considering  the  relations  which  life  insurance 
bears  to  the  state,  it  is  necessary  to  take  such  aggregate  as 
can  be  ascertained,  and  to  point  to  certain  conclusions. 
The  conditions  which  prevail  in  Connecticut  may  be  used 
as  a  fair  example.  It  is  shown  by  the  census  of  1900  that 
there  were  385,610  persons  in  Connecticut  engaged  in  all 
occupations;  of  this  number,  186,675,  or  somewhat  less 
than  one-half,  were  engaged  in  manufacturing,  and  the 
amount  paid  by  these  establishments  in  wages  and  salaries 
during  the  year  1900  was  $95,053,775.  Of  this  amount 
it  is  probably  within  the  fact  to  assume  that  two-thirds, 
or  say  $60,000,000,  was  expended  in  the  support  of  others 
than  those  earning  this  income.  If  it  is  assumed  that  the 


32  YALE  READINGS  IN  INSURANCE 

average  age  of  these  producers  is  thirty  years,  and  that 
the  present  value  of  an  annuity  at  that  age  is  $17,  and 
that  on  the  whole  the  mortality  among  these  persons  will 
follow  the  table  rate,  it  appears  that  this  income  repre- 
sents a  present  value  of  future  earnings  of  more  than  a 
thousand  million  dollars,  any  portion  of  which  capital  is 
liable  to  be  cut  off  in  any  hour  of  any  day.  But  these 
figures  apply  only  to  those  engaged  in  one  branch  of  labor, 
and  this  probably  on  the  whole  less  remunerative  than  the 
sum  total  of  other  occupations.  It  is  not  claimed  that 
these  estimates  even  approach  accuracy,  but  it  seems 
reasonable  to  believe  that  they  are  within  facts. 

The  grand  list  of  Connecticut  in  the  year  1900  amounted 
to  $694,000,000.  This  represents  the  amount  of  property 
subject  to  direct  taxation  in  the  State,  by  far  the  greater 
part  of  it  consisting  of  real  estate  and  buildings.  Theo- 
retically these  properties  are  placed  in  this  list  at  somewhat 
less  than  their  actual  value,  but  it  is  doubtful  if  taking  the 
whole  State  together,  the  value  of  real  estate  and  buildings 
is  materially  greater  than  that  placed  upon  them  in  the 
grand  list. 

From  the  estimates  which  have  here  been  made,  there 
can  be  no  doubt  whatever  that  the  present  value  of  the 
future  earnings  of  those  engaged  in  various  occupations 
in  this  State  is  many  times  the  amount  of  the  grand  list. 

The  material  wealth  of  a  state  not  only  depends  upon  its 
citizens,  but  by  far  the  greater  part  of  real  resources  of  the 
commonwealth  is  composed  of  the  actual  computable  value 
of  the  lives  of  its  inhabitants. 

The  report  of  the  Insurance  Commissioner  of  Connecticut 
for  the  year  1900  shows  that  there  were  at  the  close  of  that 
year  life  insurance  policies  outstanding  on  lives  of  citizens 
of  the  State  representing  $149,970,752  of  insurance.  Some 
of  these  have  been  in  force  for  many  years,  and  it  is  cer- 
tain that  the  average  age  of  these  policy-holders  is  much 
higher  than  that  of  the  general  population.  Assuming  it 
to  be  fifty,  it  appears  that  this  amount  of  insurance  repre- 


FUNCTION  OF  LIFE  INSURANCE  33 

sents  an  income  which  it  is  intended  to  protect  of  about 
$12,000,000.  It  is  evident  that  this  protection  is  far  less 
than  the  amount  at  risk,  and  that  the  community  is  there- 
fore constantly  sustaining  losses  by  death,  which  are  re- 
paired only  to  a  comparatively  small  degree.  The  life 
insurance  agent  is  supposed  to  prosecute  his  business 
thoroughly,  but  he  will  not  accomplish  his  full  mission 
until  the  education  of  the  public  has  proceeded  to  a  point 
where  the  real  purpose  and  the  actual  benefits  of  life  in- 
surance are  far  better  understood  than  they  are  at  this 
time. 

The  propriety  of  taxing  the  income  or  accumulations  of 
life  insurance  companies  has  led  to  many  discussions  of 
the  relations  of  these  institutions  to  the  state,  and  to  an 
expression  of  opinion  by  many  eminent  men  who  have, 
by  reason  of  such  propositions,  given  much  study  to  this 
question. 

In  a  debate  on  an  Income  Duty  Bill  in  the  House  of 
Commons  in  1798,  Pitt  said:  "Laying  aside  the  proud  idea 
of  the  vigor,  permanence,  and  renewing  energy  which  the 
measure  secured,  there  is  one  case  which,  with  a  view  to 
the  class  who  are  really  willing  to  save  for  the  benefit  of 
those  for  whom  they  are  bound  to  provide,  makes  some 
modification.  It  is  in  favor  of  those  who  have  recourse  to 
that  easy,  certain,  and  advantageous  mode  of  providing 
for  their  families  by  insuring  their  lives." 

In  1862,  when  this  country  was  seeking  means  for  meet- 
ing the  extraordinary  expenditures  occasioned  by  the  war, 
and  the  question  of  taxing  insurance  companies  was  before 
Congress,  Charles  Sumner  said:  "The  business  of  insurance, 
it  seems  to  me,  is  peculiar.  It  differs  from  other  business. 
It  is  not  strictly,  if  I  may  say  so,  a  money-making  business, 
but  it  is  a  money-saving  business.  I  know  that  persons 
get  up  insurance  companies  in  order  to  advance  their  own 
interests;  but  the  primary  object  of  the  insurance  office 
is  to  protect  other  people,  and  particularly  the  poor:  it  is 
to  help  the  poor.  I  say,  therefore,  it  is  not  primarily,  as 


34  YALE  READINGS  IN  INSURANCE 

compared  with  many  other  businesses,  a  money-making 
business.  On  this  account,  it  seems  to  me,  it  has  a  title  to 
a  certain  consideration.  Now,  what  is  proposed?  A  tax 
on  the  premium.  What  are  the  premiums?  The  premi- 
ums are  themselves  a  tax.  The  premiums  constitute  the 
tax  which  the  person  insured  pays  for  his  insurance;  and 
now  it  is  proposed  to  put  a  tax  on  a  tax.  This  is  the  pre- 
cise case.  I  state  it  in  this  way  in  order  to  simplify  it; 
in  order  to  reduce  it,  if  I  may  say  so,  to  its  most  naked 
form." 

Francis  A.  Walker  has  said:  "If  a  man's  income  belongs 
to  him  to  spend,  it  belongs  to  him  to  save;  and  on  the 
ground  of  equity,  the  state  cannot  lay  its  hands  upon  that 
which  represents  the  double  virtue  of  industry  and  fru- 
gality, while  sparing  that  which  represents  the  single  virtue 
of  industry.  Economically  considered,  there  cannot  be 
a  moment's  question  that  the  policy  of  laying  the  burden 
of  the  state  upon  that  portion  of  the  product  of  industry 
which  has  escaped  the  maw  of  appetite,  which  is  presum- 
ably reserved  for  useful  employment,  which  is  in  a  sense 
consecrated  by  worthy  social  ambition  and  which  repre- 
sents the  courage,  prudence,  and  faith  requisite  to  sub- 
ordinate the  present  to  the  future,  is  thoroughly  vicious." 

Two-thirds  of  the  adult  men  and  women  of  this  country 
are  married.  Some  of  the  remainder  are  physically  or 
mentally  unfit  for  the  marriage  state,  but  it  cannot  be 
doubted  that  whatever  agency  increases  marriages,  among 
those  who  only  postpone  this  act  because  of  a  natural  and 
prudent  apprehension  of  the  results  which  death  may  bring, 
promotes  the  well-being  and  increases  the  happiness  of  the 
community.  There  is  no  way,  except  through  life  insur- 
ance, that  many  suitable  and  advantageous  marriages 
can  be  entered  into  with  a  due  regard  for  the  happiness 
of  the  individuals  directly  interested,  and  for  the  protec- 
tion and  welfare  of  the  state. 

The  public  treasury  must  be  supplied  by  those  who  are 
benefited  by  the  expenditure  of  public  money.  Churches 


FUNCTION  OF  LIFE  INSURANCE  35 

and  schools  lessen  crime  and  pauperism,  and  thus  diminish 
public  expense.  Their  influence  is  rightly  considered  in 
distributing  the  burdens  of  taxation.  In  considering  this 
question,  which  is  of  great  and  increasing  importance,  a 
knowledge  not  only  of  the  theory  of  life  insurance,  but  also 
of  what  it  is  accomplishing  and  of  its  possibilities,  will  be 
of  advantage  to  every  one  who  seeks  to  do  his  share  for 
the  uplifting  of  the  state  of  which  he  is  a  part. 


CHAPTER  III 

HISTORY  OF  LIFE  INSURANCE;  PERIOD  OF  EARLY  BEGINNINGS1 

IT  has  been  the  endeavor  of  most  writers  to  trace  the 
practice,  if  not  the  principle,  of  assurance  as  far  back  as 
possible;  but  in  doing  this,  trifles  have  been  exaggerated 
into  matters  of  importance.  Some  authors  contend,  on 
the  authority  of  Livy,  that  it  was  in  use  during  the  Second 
Punic  War;  others,  arguing  from  a  passage  in  Suetonius, 
refer  to  the  Emperor  Claudius  as  the  first  insurer;  because, 
in  order  to  encourage  the  importation  of  corn,  he  took  all 
the  loss  or  damage  it  might  sustain  upon  himself. 

These  cases  are,  however,  entirely  exceptional,  and 
certainly  indicate  no  settled  plan,  as  the  very  fact  that 
the  Emperor  guaranteed  the  contractor  against  damage 
is  a  proof  that  there  was  no  other  mode  of  doing  so.  Cicero 
is  also  quoted,  because,  in  one  of  his  epistles,  he  expresses 
a  hope  of  finding  at  Laodicea  security  by  which  he  could 
remit  the  money  of  the  republic  without  being  exposed  to 
danger  in  its  passage. 

If,  however,  the  assertion  that  marine  assurance  was 
known  to  the  ancients  is  not  demonstrable,  there  is  no 
doubt  that  life  assurance  was  unknown  and  unpractised, 
although  the  Romans  had  some  wise  regulations  in  con- 
nection with  the  economy  of  the  people.  From  Servius 
Tullius  downwards,  they  took  a  census  every  fifth  year, 
and  the  right  of  citizenship  was  involved  in  any  one  failing 
to  comply  with  the  requirements  of  his  age,  name,  resi- 

1  By  John  Francis.  Reprinted  from  pages  25-40  of  "  Annals, 
Anecdotes,  and  Legends:  a  Chronicle  of  Life  Assurance";  Longman, 
Brown,  Green,  and  Longmans.  London,  1853. 

36 


EARLY  BEGINNINGS  37 

dence,  the  age  of  his  wife,  the  number  of  his  children, 
slaves,  and  cattle,  together  with  the  value  of  his  property. 
They  do  not  seem  to  have  kept  any  exact  mortuary  regis- 
ter, as  the  chief  object  of  their  census  was  to  levy  men  and 
money  for  the  purpose  of  conquest.  One  of  the  com- 
mentators on  the  Justinian  Code  also  gave  a  calculation 
of  the  worth  of  annuities,  which,  if  it  may  be  accepted 
as  an  expectation  of  life,  gives  far  more  correct  views  of 
its  comparative  value  at  various  ages  than  was  known  in 
Europe  until  the  time  of  De  Witt. 

Turning  from  these  vague  theories  of  an  antique  age  to 
our  own  country,  we  find  that  associations  founded  on 
social  principles,  in  which  union  for  good  or  for  ill,  and  in 
which  provision  was  made  for  contingencies,  were  the 
prominent  features,  are  to  be  found  in  our  Saxon  annals. 
The  axiom,  that  "Union  is  Strength,"  the  necessity  of 
providing  for  casualties  by  mutual  assistance,  in  other 
words,  assurance  on  its  broadest  and  most  rational  basis, 
was  practised  in  the  Saxon  guild,  the  origin  of  which  was 
very  simple:  Every  freeman  of  fourteen  being  bound  to 
find  sureties  to  keep  the  peace,  certain  neighbors,  composed 
of  ten  families,  became  bound  for  one  another,  either  to 
produce  any  one  of  the  number  who  should  offend  against 
the  Norman  law,  or  to  make  pecuniary  satisfaction  for 
the  offense.  To  do  this,  they  raised  a  fund  by  mutual 
payments,  which  they  placed  in  one  common  stock.  This 
was  pure  mutual  assurance.  From  this  arose  other  frater- 
nities. The  uncertain  state  of  society,  the  fines  which  were 
arbitrarily  levied,  the  liability  to  loss  of  life  and  property 
in  a  country  divided  against  itself,  rendered  association 
a  necessity.  And  if  it  was  necessary  before  the  Conquest, 
it  became  doubly  so  after  it.  The  mailed  hand  of  the 
Norman  knight  was  ever  ready  to  grasp  the  goods  of  the 
Saxon  serf;  and  the  Norman  noble  trod  the  ground  he  had 
aided  to  subdue,  with  the  pride  of  a  conqueror,  at  the  same 
time  that  he  exercised  the  rapacity  of  an  Eastern  vizier. 
To  meet  the  pecuniary  exigencies  which  were  perpetually 

208198 


38  YALE  READINGS  IN  INSURANCE 

arising  from  fines  and  forfeitures,  and  to  aid  one  another 
in  burials,  legal  exactions,  penal  mulcts,  payments,  and 
compensation,  —  ancient  friendly  societies,  somewhat  simi- 
lar to  those  of  the  present  day,  were  established;  and  the 
rules  of  one  which  existed  at  Cambridge  prove  its  approxi- 
mation to  the  modern  mutual  friendly  association.  The 
following  extracts  will  satisfy  the  reader  of  the  truth  of 
this  assertion: 

"1.  It  is  ordained,  that  all  the  members  shall  swear 
by  the  holy  reliques  that  they  will  be  faithful  to  each  of 
their  fellow-members,  as  well  in  religious  as  in  worldly 
matters;  and  that,  in  all  disputes,  they  will  always  take 
part  with  him  that  has  justice  on  his  side. 

"2.  When  any  member  shall  die,  he  shall  be  carried  by 
the  whole  Society  to  whatever  place  of  interment  he  shall 
have  chosen;  and  whoever  shall  not  come  to  assist  in 
bearing  him  shall  forfeit  a  sextarium  of  honey :  the  Society 
making  up  the  rest  of  the  expense,  and  furnishing  each  his 
quota  towards  the  funeral  entertainments;  and  also, 
secondly,  for  charitable  purposes,  out  of  which  as  much 
as  is  meet  and  convenient  is  to  be  bestowed  upon  the 
church  of  St.  Etheldred. 

"3.  When  any  member  shall  stand  in  need  of  assistance 
from  his  fellow-members,  notice  thereof  shall  be  given  to 
the  Reeve  or  Warden  who  dwells  nearest  that  member, 
unless  that  member  be  his  immediate  neighbor;  and  the 
Warden,  if  he  neglect  giving  him  relief,  shall  forfeit  one 
pound.1  In  like  manner,  if  the  President  of  the  Society 
shall  neglect  coming  to  his  asssistance,  he  shall  forfeit  one 
pound,  unless  he  be  detained  by  the  business  of  his  lord  or 
by  sickness. 

"4.  If  any  one  shall  take  away  the  life  of  a  member, 
his  reparatory  fine  shall  not  exceed  eight  pounds ;  but  if  he 
obstinately  refuse  to  make  reparation,  then  shall  he  be 
prosecuted  by  and  at  the  expense  of  the  whole  Society; 
and  if  any  individual  undertake  the  prosecution,  then 

1  About  as  much  silver  as  is  now  coined  into  £3  Is.  lid. 


EARLY  BEGINNINGS  39 

each  of  the  rest  shall  bear  an  equal  share  of  the  expenses. 
If,  however,  a  member  who  is  poor  kill  any  one,  and  com- 
pensation must  be  made,  then,  if  the  deceased  was  worth 
1200  shillings,  each  member  shall  contribute  half  a  mark  l; 
but  if  the  deceased  was  a  hind,  each  member  shall  con- 
tribute two  orse  2;  if  a  Welchman,  only  one. 

"5.  If  any  member  shall  take  away  the  life  of  another 
member,  he  shall  make  reparation  to  the  relations  of  the 
deceased,  and  besides  make  atonement  for  his  fellow- 
member  by  a  fine  of  eight  pounds,  or  lose  his  right  of 
fellowship  to  the  Society.  And  if  any  member,  except  only 
in  the  presence  of  the  king,  or  bishop,  or  an  alderman, 
shall  eat  or  drink  with  him  who  has  taken  away  the  life 
of  a  fellow-member,  he  shall  forfeit  one  pound,  unless  he 
can  prove,  by  the  evidence  of  two  witnesses  on  oath,  that 
he  did  not  know  the  person. 

"6.  If  any  member  shall  treat  another  member  in  an 
abusive  manner,  or  call  him  names,  he  shall  forfeit  a  quart 
of  honey;  and  if  he  be  abusive  to  any  other  person,  who 
is  not  a  member,  he  shall  likewise  forfeit  a  quart  of 
honey. 

"7.  If  any  member,  being  at  a  distance  from  home, 
shall  die  or  fall  sick,  his  fellow-members  shall  send  to 
fetch  him,  either  alive  or  dead,  to  whatever  place  he  may 
have  wished,  or  be  liable  to  the  stated  penalty;  but  if  a 
member  shall  die  at  home,  every  member  who  shall  not 
go  to  fetch  his  corpse,  and  every  member  who  shall  absent 
himself  from  his  obsequies,  shall  forfeit  a  sextarium  of 
honey." 

These  rules  might  have  been  certified  by  a  Pratt,  so 
simple  and  so  excellent  is  their  arrangement.  But  they 
must  not  be  regarded  as  exceptional.  The  following  form 
a  portion  of  the  regulations  of  another  similar  society  at 
Exeter :  — 

"1.  At  each  meeting  every  member  shall  contribute 

1  Equal  in  weight  to'about  £2  Is.  3d.  of  our  silver  coinage. 

2  Equal  in  weight  to  10s.  4d.  of  our  present  silver  coinage. 


40  YALE  READINGS  IN  INSURANCE 

two  sextaria  of  barley  meal,  and  every  knight  one,  to- 
gether with  his  quota  of  honey. 

"2.  When  any  member  is  about  to  go  abroad,  each  of 
his  fellow-members  shall  contribute  five  pence;  and  if  any 
member's  house  is  burnt,  one  penny. 

"3.  If  any  one  should  by  chance  neglect  the  stated 
time  of  meeting,  his  regular  contribution  to  be  doubled." 

Well  may  Mr.  Ansell  say,  "The  guilds  or  social  corpora- 
tions of  the  Anglo-Saxons  seem,  on  the  whole,  to  have 
been  friendly  associations,  made  for  mutual  aid  and  con- 
tribution, to  meet  the  pecuniary  exigencies  which  were 
perpetually  arising."  Nor  can  the  reader  fail  to  be  struck 
with  the  resemblance  these  rules  bear  to  those  of  many 
of  the  modern  societies;  and,  as  they  were  framed  800 
years  ago,  the  similitude  is  somewhat  remarkable.  After 
the  Conquest  guilds  were  established  for  the  express  pro- 
motion of  religion,  charity,  or  trade,  and  from  these  fra- 
ternities the  various  companies  and  city  corporations  have 
arisen.  The  following,  forming  a  portion  of  the  rules  of 
St.  Catherine's  Guild,  seem  like  those  of  some  modern 
fraternity: 

"If  a  member  suffer  from  fire,  water,  robbery,  or  other 
calamity,  the  guild  is  to  lend  him  a  sum  of  money  without 
interest. 

"If  sick  or  infirm,  through  old  age,  he  is  to  be  supported 
by  his  guild  according  to  his  condition. 

"If  a  member  falls  into  bad  courses,  he  is  first  to  be 
admonished,  and  if  found  to  be  incorrigible  he  is  to  be 
expelled. 

"Those  who  die  poor,  and  cannot  afford  themselves 
burial,  are  to  be  buried  at  the  charge  of  the  guild." 

Societies  like  these,  established  at  a  period  when  "the 
good  old  rule,  the  simple  plan,  that  they  should  take  who 
have  the  power,  and  they  should  keep  who  can,"  was 
almost  the  law  of  the  land,  cannot  fail  to  surprise  those 
who  believe  that  the  past  was  an  age  of  barbarism,  and 
the  present  the  culminating  point  of  civilization.  It  is 


EARLY  BEGINNINGS  41 

certainly  a  curious  truth,  that  that  combination  which 
has  been  esteemed  a  peculiar  feature  of  modern  times 
had  its  antetype  in  societies  framed  when  commerce  and 
law  were  yet  in  their  infancy. 

Of  the  rise  of  assurance  generally  in  Europe  the  infor- 
mation is  limited  enough.  Malynes  and  Anderson  say  it 
was  known  about  the  year  1200,  and  refer  to  the  marine 
laws  of  the  isle  of  Oleron;  but  a  perusal  of  these  has  satis- 
fied later  writers  that  the  theory  was  too  hastily  adopted, 
and  that  the  earliest  ordinance  on  the  subject  with  which 
we  are  acquainted  is  that  of  the  magistrates  of  Barcelona, 
in  1523,  to  which  city  must  be  attributed  the  honor,  until 
some  authentic  evidence  to  the  contrary  has  been  pro- 
duced. 

The  first  English  statute  relating  to  marine  assurance 
was  passed  in  1601.  The  earliest  mention  of  it  occurs 
in  1548,  in  a  letter  written  by  the  Protector  Somerset  to 
his  brother,  the  Lord  Admiral,  and  that  it  was  commonly 
known  in  1558  may  be  gathered  from  a  speech  of  the  Lord 
Keeper  Bacon.  In  the  act  alluded  to  above,  "An  Act 
concerning  Matters  of  Assurances  among  Merchants,"  it 
is  stated,  that  "it  hath  been  time  out  of  mind  an  usage 
among  merchants,  both  of  this  realm  and  of  foreign  nations, 
when  they  make  any  great  adventure,  specially  into  re- 
mote parts,  to  give  some  consideration  of  money  to  other 
persons,  to  have  from  them  assurance  made  of  their  goods, 
merchandises,  ships,  and  things  adventured,  or  some  parts 
thereof,  at  such  rates  and  in  such  sort  as  the  parties 
assurers  and  the  parties  assured  can  agree;  which  course  of 
dealing  is  commonly  called  a  policy  of  assurance,  by  means 
of  which  policies  of  assurance  it  cometh  to  pass,  upon  the 
loss  or  perishing  of  any  ship,  there  followeth  not  the  loss 
or  undoing  of  any  man,  but  the  loss  lighteth  rather  easily 
upon  many  than  heavily  upon  few,  and  rather  upon  them 
that  adventure  not  than  on  those  that  do  adventure." 

If  mercantile  or  marine  assurance  were  so  common,  it 
is  difficult  to  imagine  that  some  approximation  to  life 


42  YALE  READINGS  IN  INSURANCE 

assurance,  however  imperfect  or  normal  it  might  be,  was 
entirely  unpractised.  It  must  necessarily  have  occurred 
to  the  captain  of  a  trading  vessel,  that  the  storm  or  the 
whirlwind,  which  might  send  his  merchandise  to  the 
bottom  of  the  sea,  might  also  send  himself  with  it;  and 
the  thought  that,  if  his  goods  were  worth  insuring  for  the 
benefit  of  the  owners,  his  own  life  was  worth  insuring  for 
the  benefit  of  his  family,  arose  naturally  from  the  risks 
he  ran.  And  in  those  days  there  was  not  merely  a  risk  of 
storm  or  whirlwind.  Man  was  more  cruel  than  the  tem- 
pest; and  the  galleys  of  the  Turks  were  then  as  much  feared, 
by  the  masters  of  trading  vessels,  as  the  corsairs  of  the 
Algerine  were  dreaded  at  a  later  period.  They  roved  the 
seas  as  if  they  were  its  masters;  they  took  the  vessels,  dis- 
posed of  the  cargo  in  the  nearest  market,  and  sold  the 
navigators  like  cattle.  The  only  way  of  mitigating  this 
terrible  calamity  was  by  some  mode  of  insurance,  to  pro- 
cure their  rescue  if  taken;  and  we  find  that  to  attain  so 
desirable  a  result  they  paid  a  certain  premium  to  their 
merchant  freighters,  who,  in  return,  bound  themselves  to 
pay  a  sufficient  sum  to  secure  the  navigator's  freedom 
within  fifteen  days  after  the  certificate  of  their  captivity, 
the  ordinary  days  of  grace  being  lessened  on  such  policies. 
In  those  days,  also,  when  crusades  were  common,  and 
men  undertook  pilgrimages  from  impulse  as  much  as  from 
religion,  it  was  desirable  that  the  palmer  should  perform 
his  vows  with  safety,  if  not  with  comfort.  The  chief 
danger  of  his  journey  was  captivity.  The  ballads  of  the 
fifteenth  century  are  full  of  stories  which  tell  of  pilgrims 
taken  prisoners,  and  of  emirs'  daughters  releasing  them; 
but  as  the  release  by  Saracen  ladies  was  more  in  romance 
than  in  reality,  and  could  not  be  calculated  on  with  pre- 
cision, a  personal  insurance  was  entered  into,  by  which, 
in  consideration  of  a  certain  payment,  the  assurer  agreed 
to  ransom  the  traveler,  and  thus  the  palmer  performed 
his  pilgrimage  as  secure  from  a  long  captivity  as  money 
could  make  him.  It  is  true  that  this  care  for  his  personal 


EARLY  BEGINNINGS  43 

safety  may  detract  somewhat  from  a  high  religious  feeling; 
but  truth  is  sadly  at  variance  with  sentiment,  and  the 
pilgrims  of  the  crusading  period  were  but  too  glad  to  lessen 
the  chances  against  them. 

Another  mode  of  assurance  was  commonly  practised,  by 
which  any  traveler  departing  on  a  long  or  dangerous 
voyage  deposited  a  specific  amount  in  the  hands  of  a  money 
broker,  on  condition  that  if  he  returned  he  should  receive 
double  or  treble  the  amount  he  had  paid ;  but,  in  the  event 
of  his  not  returning,  the  money  broker  was  to  keep  the 
deposit,  which  was  in  truth  a  premium  under  another 
name. 

In  1643  Captain  John  Bulmer  published,  "Propositions 
in  the  Office  of  Assurance,  London,  for  the  blowing  up 
of  a  boat  and  a  man  over  London  Bridge."  Nor  was  this 
an  unusual  mode  of  conducting  an  enterprise  which  was 
at  once  ingenious  and  costly,  and  which  required  a  union 
of  capital  to  support  it.  In  the  address  above  alluded  to, 
Bulmer,  an  unsuccessful  engineer,  pledged  himself  to  per- 
form his  promise  within  a  month  after  intimating  from 
the  office  that  he  was  ready;  "viz.,  so  soon  as  the  under- 
takers wagering  against  him,  six  for  one,  should  have 
deposited  enough  to  pay  the  expenses  of  boat  and  engine," 
he  also  subscribing  his  own  proportion.  The  money  was 
not  to  be  paid  until  the  Captain  had  performed  his  contract, 
when  he  was  to  receive  it  all.  If,  however,  he  should  fail, 
it  was  to  be  repaid  to  the  subscribers.  "And  all  those 
that  will  bring  their  money  into  the  office  shall  there  be 
assured  of  their  loss  or  gain,  according  to  the  conditions 
above  named." 

These  facts  are  an  evidence  that  the  principle  of  assur- 
ance was  making  way,  and  that  men  endeavored  to  pro- 
vide against  the  chances  or  mischances  of  life,  to  the  best 
of  their  ability.  Thus,  any  seafaring  person  proceeding 
on  a  voyage  could  insure  his  life  for  the  benefit  of  his 
heirs;  and  if  the  information  which  has  come  down  to  us 
limits  the  practice  to  this  particular  class,  it  was  because 


44  YALE  READINGS  IN  INSURANCE 

seamen  were  the  chief  visitors  to  foreign  countries,  and 
for  them  some  such  plan  was  essentially  a  necessity. 

But  there  was  a  further  and  more  remarkable  fact  in 
operation;  as  an  annuitant  enjoying  a  life-rent  or  pension 
could  make  an  insurance  on  his  life,  by  way  of  provision 
for  his  family.  These,  however,  were  only  exceptional 
cases,  for  which  the  premiums  were  probably  distressingly 
heavy,  if  we  may  judge  from  the  fact  that  a  century 
later  the  life  of  a  healthy  man,  of  any  age,  was  estimated 
at  only  seven  years'  purchase.  The  great  merchants  of 
that  day  were  chiefly  responsible  for  such  assurances,  and 
many  of  the  corporations  engaged  in  these  and  similar 
adventures.  The  following  will  show  that  by  1569  the 
provident  societies  of  the  present  day  were  anticipated. 
The  writer  is  illustrating  his  opinion  on  usury. 

"A  merchant  lendeth  to  a  corporation  or  company 
£100,  which  corporation  hath  by  statute  a  grant,  'that 
whosoever  lendeth  such  a  sum  of  money,  and  hath  a  child 
of  one  year,  shall  have  for  his  child,  if  the  same  child  do 
live  till  he  be  full  15  years  of  age,  £500  of  money;  but  if 
the  child  die  before  that  time,  the  father  to  lose  his  prin- 
cipal for  ever.'  Whether  is  this  merchant  an  usurer  or 
not?  The  law  says,  if  I  lend  purposely  for  gain,  notwith- 
standing the  peril  or  hazard,  I  am  an  usurer." 

Again:  "A  corporation  taketh  £100  of  a  man,  to  give 
him  £8  in  the  £100  during  his  life  without  restitution  of 
the  principal.  It  is  no  usury,  for  that  here  is  no  lending, 
but  a  sale  forever  of  so  much  rent  for  so  much  money. 
Likewise,  if  a  private  man  have  £1000  lying  by  him,  and 
demandeth  for  his  life  and  his  wife's  life  £100  by  the  year, 
and  never  to  demand  the  principal,  it  is  a  bargain  of  sale 
and  no  usury." 

But  though  these  things  are  evidences  of  something 
closely  akin  to  the  principles  of  life  assurance,  it  is  certain 
that  no  system  existed  by  which  so  happy  a  result  could 
he  habitually  attained.  The  state  of  society  was  opposed 
to  it.  Life  was  then  scarce  "worth  a  pin's  fee."  The 


EARLY  BEGINNINGS  45 

noble  was  at  the  mercy  of  his  own  fierce  passions,  and, 
if  not  engaged  in  some  intestine  warfare,  was  crossing  and 
recrossing  seas,  was  making  or  unmaking  kings.  The 
knight  sought  dangerous  adventures  with  an  avidity 
which  would  place  his  life  on  the  trebly  hazardous  list  of 
assurance  offices,  and  pale  the  roses  on  the  cheeks  of 
directors.  The  citizen,  again,  was  constantly  embroiled 
in  quarrels  with  which  he  had  no  business,  and  merchants 
would  have  looked  doubtfully  on  any  proposal  to  accept 
a  life  which  was  likely  enough  to  end  the  day  after  its 
assurance. 

In  addition  to  these  chances,  there  was  the  liability 
to  "plague,  pestilence,  and  famine."  The  black  pest,  the 
sweating  sickness,  the  smallpox,  are  names  to  conjure  up 
frightful  images.  Nothing  is  now  certainly  known  of  the 
numbers  which  these  diseases  swept  away  in  our  early 
history,  but  the  rapidity  with  which  whole  families  dis- 
appeared tended  to  exaggerate  the  feeling  of  insecurity. 
It  seems,  therefore,  almost  impossible  to  suppose  that  any 
plan  of  life  assurance  could  have  existed  during  these  ages, 
when  there  were  no  documents  to  give  the  number  of 
deaths,  and  no  laws  to  determine  the  value  of  life.  But 
if  assurances  were  rare,  we  have  constant  evidence  that 
annuities  were  familiar  enough.  The  state  employed  them 
for  its  wants;  scriveners  enployed  them  for  the  necessities 
of  their  clients;  Pole  and  Whittington,  Canning  and 
Gresham,  invested  their  mercantile  gains  in  them;  the 
usurer  made  his  money  breed  by  granting  them  in  many 
forms  and  on  various  securities;  and  although  to  arrive 
at  a  just  system  of  annuities  was  as  difficult  as  a  just 
system  of  assurance,  yet  the  usurer  took  as  much  care  in 
the  one  case  to  secure  his  own  interest,  as  he  would  in 
the  other  had  it  been  an  operation  into  which  he  chose 
to  enter. 


CHAPTER  IV 

ORIGIN  OF  THEORY   OF  LIFE   INSURANCE1 

IN  the  early  annals  of  this  country  there  was  no  foun- 
dation whatever  on  which  to  form  a  theory  of  the  value 
of  life.  The  wars  of  succession,  intestine  strife,  and  civil 
discord,  killed  their  thousands.  Disease,  arising  from 
exposure  to  the  air,  from  foul  dwelling-places,  and  from 
an  absence  of  the  comforts  of  advanced  civilization,  slew 
its  tens  of  thousands.  They  who  were  spared  by  the 
sword  and  escaped  the  pestilence  perished  too  often  by 
the  fire  of  persecution.  Death  came  in  forms  which  were 
governed  by  no  known  laws;  and,  notwithstanding  the 
insecurity  of  life,  there  was  no  possibility  of  making  a 
provision  for  survivors.  To  this  we  owe  that  kind  con- 
sideration for  the  widows  and  orphans  of  their  members 
which  is  observable  in  many  of  the  city  corporate  bodies. 

Commerce  was  yet  in  its  infancy,  and  all  the  capital 
which  could  be  collected  was  necessary  to  its  develop- 
ment. It  was,  indeed,  on  this  that  the  wisdom  of  the 
executive  was  concentrated.  Every  half  century  brought 
rumors  of  some  new  land  which  was  to  enrich  the  adven- 
turers who  combined  to  explore  it.  The  most  gallant 
spirits  of  England  sailed,  and  not  always  in  the  stoutest 
vessels,  to  explore  a  new  passage,  or  to  trade  on  the  shores 
of  some  new  country,  alike  indifferent  where  they  went 
or  how  long  they  remained,  provided  they  could  bring 
home  some  attractive  article  of  merchandise.  Every 

1  By  John  Francis.  Reprinted  from  pages  1-12,  et  seq.,  of  "Annals, 
Anecdotes,  and  Legends:  A  Chronicle  of  Life  Assurance";  Longman, 
Brown,  Green,  and  Longmans.  London,  1853. 

46 


ORIGIN  OF  THEORY  47 

energy  was,  therefore,  devoted  to  the  extension  of  our 
mercantile  interests;  and  although  Lombards,  goldsmiths, 
Jews,  and  usurers  frequently  granted  annuities,  there 
appears  to  have  been  no  united  attempt  to  grant  assur- 
ances on  lives. 

This  universal  spirit  of  commerce  produced,  however, 
marine  assurance  very  early,  while  the  gradual  progressive 
movements  made  in  science  and  philosophy  prepared  the 
way  for  assurance  on  life.  The  rude  notions  of  an  un- 
cultivated age  were  succeeded  by  broader  and  more  states- 
manlike views;  the  Roman  Church,  with  its  narrow  notions 
and  its  denunciations  of  progress,  ceased  to  exist;  men 
feared  no  longer  to  give  a  free  exposition  of  their  principles; 
and  the  Provincial  Letters  of  Pascal  prove  that  a  new  era 
had  arrived.  The  doctrine  of  probabilities,  —  originated 
at  a  gaming-table,  —  so  curious,  so  interesting,  and  at  the 
same  time  so  necessary  to  the  present  subject,  was  first 
popularized  by  this  great  genius;  but  we  are  indebted  to 
Holland  for  its  earliest  application  to  annuities;  as  when 
the  States-General  resolved  to  negotiate  some  life  pay- 
ments, the  pensionary,  John  de  Witt,  added  one  more 
obligation  to  the  many  received  from  this  distinguished 
man,  by  employing  the  theory  which  Pascal  suggested, 
for  the  requirements  of  his  government.  His  report  and 
treatise  on  the  terms  of  life  annuities  is  the  first  document 
of  the  kind,  and  a  most  important  paper  it  is.  Step  by 
step  it  explains  the  grounds  on  which  the  proposition  of 
its  author  was  based,  and  by  which  he  arrived  at  the  con- 
clusion that  the  value  of  a  life  annuity,  in  proportion  to 
one  for  a  term  of  twenty-five  years,  was  really  "not  below, 
but  certainly  above,  sixteen  years'  purchase."  It  is  prob- 
able that  from  political  motives  this  paper  was  suppressed, 
but  John  de  Witt  was  certainly  the  first  who  thought  of 
applying  mathematical  calculations  to  political  questions, 
and  the  first  who  attempted  to  £x  the  rate  of  annuities 
according  to  the  probabilities  of  life.  The  essay  of  the 
pensionary  was,  however,  but  little  known  to  the  public, 


48  YALE  READINGS  IN  INSURANCE 

and  had  no  sensible  influence  on  the  subsequent  progress 
of  the  science. 

Leibnitz,  whose  hobby  was  to  investigate  the  theory  of 
chances,1  first  drew  attention  to  this  production;  but 
though  often  alluded  to,  its  very  title  was  not  correctly 
given,  and  we  are  indebted  to  the  researches  of  Mr.  Hen- 
driks  for  its  rescue  from  an  unmerited  oblivion,  and  for 
the  able  translation  of  an  essay  which,  had  it  been  pub- 
lished at  the  time  it  was  written,  would  have  exercised  an 
important  influence  on  its  subject.2  Up  to  the  end  of  the 
seventeenth  century,  therefore,  as  there  were  no  laws 
to  calculate  the  chances  of  mortality,  life  annuities  were 
granted  according  to  the  caprice  of  the  usurer,  or  the 
ignorance  of  the  annuitant;  and  there  is  no  occasion  to 
remind  the  reader  that  the  barbaric  splendor  of  the  Tudors 
witnesses  customs  which,  rendering  the  conditions  of  life 
terribly  uncertain,  had  a  depressive  effect  on  the  science 
of  assurance.  The  smallpox,  a  frequent  and  fearful 
visitor,  was  only  met  by  an  attempt  to  stare  it  out  of 
countenance;  for  to  effect  a  cure  the  patient  was  clothed 
in  scarlet,  the  bed  was  covered  with  scarlet,  and  the  walls 
were  hung  with  scarlet;  so  simple  and  so  ignorant  were 
the  leeches  of  the  early  ages.  Dysentery,  then  known 
by  its  Saxon  synonyms  of  the  "flux,"  "scouring,"  and 
"griping,"  daily  carried  off  the  unwashed  artificers  of  old 
London.  Nor  were  dirty  habits  confined  to  the  mere 
populace;  the  banqueting-halls  of  the  palace  were  rarely 
or  ever  cleansed;  the  accumulations  of  months  were  left 
on  the  floors,  which,  to  hide  the  dirt  and  preserve  an 
appearance  of  decency,  were  periodically  covered  with 
rushes.3  In  such  places  disease  was  ever  ready  to  spring 

1  When  asked  what  benefit  it  would  produce,  he  replied,  "  C'est 
pour  perfectionner  1'art  des  arts,  1'art  de  penser!"     This,   at   first 
regarded  as  a  mot,  became  a  proverb. 

2  The  title  of  this  essay  is  "  Waardye  van  Lyf-Renten  naer  proportie 
van  Losrenten";  or,  "The  Value  of  Life  Annuities  in  Proportion  to 
Redeemable  Annuities." 

3  There  was  no  just  cause  for  surprise  in  these  periodical  visitations. 


ORIGIN  OF  THEORY  49 

into  vigorous  life.  Every  few  years,  fevers  which  had 
been  lurking  in  alleys  and  ravaging  obscure  places  dev- 
astated the  city  under  various  names.  At  last,  that 
awful  sickness  which,  even  at  the  present  day,  chills  the 
blood  but  to  think  of  it,  seemed  to  be  naturalized  in  this 
country,  under  the  name  of  the  plague;  but  to  it  we  owe 
that  the  initiative  step  was  taken  in  England,  in  founding 
the  first  principles  which  govern  life  assurance,  for  to  it 
we  owe  our  earliest  bills  of  mortality. 

Within  a  period  of  seventy  years  London  had  been  visited 
by  the  plague  five  separate  times;  145,000  having  died  from 
its  collective  attacks.  As  the  visitation  had  been  governed 
by  no  known  system,  as  it  came  without  any  apparent 
cause  and  disappeared  quite  as  capriciously,  the  Londoners 
never  felt  safe  from  its  reappearance.  It  seemed  always 
hovering  over  them;  and  as  the  intervals  between  its  de- 
parture and  return  were  sometimes  only  eleven  years,  and 
had  never  exceeded  twenty-nine,  its  harassing  impressions 
were  constantly  on  the  minds  of  the  citizens.  Its  visits 
did  not  allow  time  even  to  soften  or  subdue  the  painful 
remembrances  connected  with  it;  and  were  it  necessary, 

The  thinkers  of  the  day  understood  the  connection  between  cleanli- 
ness and  health;  and  the  following  will  show  that  such  as  these  hit  on 
the  right  source  of  pestilence :  — 

"I  often  wonder,"  says  Erasmus  in  a  letter  to  Dr.  Francis,  "and  not 
without  concern,  whence  it  comes  to  pass,  that  England  for  so  many 
years  hath  been  continually  afflicted  with  pestilence,  and  above  all, 
with  the  sweating  sickness,  which  seems  in  a  manner  peculiar  to  that 
country.  .  .  .  They  glaze  a  great  part  of  the  sides  with  small  panes, 
designed  to  admit  the  light,  and  exclude  the  wind;  but  these  windows 
are  full  of  chinks,  through  which  enters  a  percolated  air,  which,  stag- 
nating in  the  room,  is  more  noxious  than  the  wind. 

"As  to  the  floors,  they  are  usually  made  of  clay,  covered  with  rushes 
that  grew  in  fens,  which  are  so  slightly  removed  now  and  then,  that 
the  lower  part  remains  sometimes  for  twenty  years  together,  and  in 
it  a  collection  of  spittle,  vomit,  urine  of  dogs  and  men,  beer,  scraps 
of  fish,  and  other  filthiness  not  to  be  named.  Hence,  upon  change 
of  weather,  a  vapor  is  exhaled  very  pernicious,  in  my  opinion,  to  the 
human  body." 


50  YALE  READINGS  IN  INSURANCE 

a  reference  to  the  letters,  diaries,  and  chronicles  of  the  day 
would  show  that  the  name  of  the  plague  turned  men  pale, 
and  predisposed  their  constitutions  for  its  reception;  that 
the  very  thought  made  the  merchant  regardless  of  'Change 
and  of  counting-house;  and  that  the  tradesman  shuddered 
at  the  memory  of  a  disease  which  slew  his  children,  de- 
populated London,  and  destroyed  his  business. 

The  reports  of  the  approach  of  the  plague  were,  then, 
a  positive  and  practical  evil;  and  in  1592,  when  30,561 
died  of  the  disease,  the  rumors  of  its  horrors,  appalling 
as  these  were  in  reality,  were  enormously  exaggerated. 
An  attempt  to  quiet  public  feeling  by  correctly  indica- 
ting its  progress  was,  therefore,  made  in  the  bills  of 
mortality;  and  though  they  were  not  at  first  maintained 
consecutively,  they  were  afterwards  found  so  useful  as 
to  be  continued  from  29th  December,  1603,  to  the  present 
time.1  The  mode  of  their  production  was  simple.  When 
any  one  died  it  was  indicated  either  by  tolling  or  ringing 
a  bell,  or  by  bespeaking  a  grave  of  the  sexton.  The  sexton 
informed  the  searchers,  who  hereupon  "repair  to  the 
place  where  the  dead  corpse  is,  and  by  view  of  the  same 
and  by  other  inquiries  they  examine  by  what  disease  or 
casualty  the  corpse  died.  Hereupon  they  make  their 
report  to  the  parish-clerk;  and  he,  every  Tuesday  night, 
carries  in  an  account  of  all  the  burials  and  christenings 
happening  that  .week,  to  the  parish-clerks'  hall.  On 
Wednesday  the  general  account  is  made  up  and  printed; 
and  on  Thursday  published  and  disposed  of  to  the  several 
families  who  will  pay  4s.  per  annum  for  them."  In  1629, 
two  editions  of  the  weekly  bills  were  printed,  one  with 

1  The  first  parish  registers  were  kept  in  England  in  1538,  in  conse- 
quence of  an  injunction  from  Thomas  Cromwell.  They  had  been  kept 
for  a  long  time  previous  in  Augsburg  and  Breslau,  though  it  was  not 
till  the  beginning  of  the  seventeenth  century  that  they  were  general  in 
Europe.  It  is  worth  mentioning  that,  long  ere  this,  the  paternal  gov- 
ernment of  Peru  kept  a  register  of  all  the  births  and  deaths  throughout 
the  country;  exact  returns  of  the  population  being  made  every  year  by 
officers  appointed  by  the  state. 


ORIGIN  OF  THEORY  51 

the  casualties  and  diseases,  and  the  other  without.  For 
a  long  time  these  papers  were  made  but  little  use  of  by 
the  public.  A  writer  of  the  day  says  they  were  examined 
at  the  foot,  to  see  whether  the  burials  increased  or  de- 
creased; they  were  glanced  at  for  the  casualties,  as  a  matter 
of  gossiping  interest;  and  in  the  plague  time,  the  progress 
of  the  pest  was  closely  watched  by  the  courtiers  and  the 
nobles,  that  they  might  escape  its  ravages;  and  by  the 
citizens,  with  that  morbid  feeling  which  is  as  much 
attached  to  extraordinary  calamities  as  to  great  crimes. 
But  though  this  might  be  the  case  ordinarily,  such  was 
not  the  view  with  which  a  citizen  of  London,  by  name 
John  Graunt,  thought  they  should  be  regarded.  This 
man  was  the  author  of  the  first  English  work  on  the  sub- 
ject, entitled  "Natural  and  Political  Observations  on  the 
Bills  of  Mortality."  Little  is  known  of  his  antecedents, 
save  that  he  was  the  son  of  one  Henry  Graunt  of  Lancaster, 
that  he  was  born  in  "Birching  Lane,"  and  that  he  had  the 
ordinary  education  granted  to  the  sons  of  tradesmen.  He 
came  early  into  business,  passed  through  the  chief  offices 
of  his  ward  with  reputation,  and  became  captain  and  major 
of  the  train-bands,  when  such  an  office  involved  danger 
as  well  as  honor. 

All  that  had  hitherto  been  said  of  Graunt  might  be  said 
of  many.  But  Graunt's  genius  was  far  from  being  con- 
fined within  these  limits.  It  shone  through  all  the  dis- 
advantages of  mean  birth  and  doubtful  breeding.  It 
broke  down  the  barriers  of  rank  and  the  limits  of  position, 
and  gave  him  the  first  thought  of  a  design,  which  was  the 
earliest  movement  in  economical  arithmetic,  and  the  closest 
approximation  to  the  data  on  which  life  assurance  is 
founded. 

The  exact  time  is  not  known  when  he  began  to  collect 
and  to  consider  the  bills  of  mortality;  but  he  says  his 
thoughts  had  been  turned  that  way  for  several  years, 
before  he  had  any  design  of  recording  certain  notions  he 
had  formed.  Until  he  published  his  volume,  a  more  than 


52  YALE  READINGS  IN  INSURANCE 

Egyptian  darkness  was  on  the  eyes  of  the  people,  and  he 
had  to  combat  some  very  singular  notions.  Among  others, 
that  London  was  to  be  reckoned  by  millions,  that  the 
proportion  of  women  to  men  was  three  to  one,  and  that 
in  twenty-six  years  the  population  had  increased  two 
millions.  "Men  of  great  experience  in  this  city  talk 
seldom  under  millions  of  people  to  be  in  London."  To 
grapple  with  these  and  similar  errors  was  Graunt's  object; 
and  it  is  easy  to  comprehend  that  his  readers  rebelled 
against  assertions  which  lowered  the  pretensions  of  their 
favorite  city.  It  is  probable  that  he  made  some  enemies 
by  his  book;  as  when  the  fire  of  London  occurred,  he  was 
accused  of  having  gone  to  the  reservoir  of  the  New  River 
Company,  and  of  cutting  off  the  supply  of  water.  As, 
however,  he  had  changed,  or  was  on  the  point  of  changing, 
his  creed  from  puritanism  to  papistry,  and  the  papists 
had  the  credit  of  originating  the  fire,  the  accusation  was 
possibly  a  party  one,  and  is  of  little  importance  now.  It 
is  with  his  work  on  the  population  we  have  to  deal,  and 
this,  which  contained  "a  new  and  accurate  thesis  of 
policy,  built  on  a  more  certain  reasoning  than  had  yet  been 
adopted,"  was  first  published  in  1664;  meeting  with  such 
an  extraordinary  reception  that  another  edition  was 
called  for  in  the  following  year,  the  book  being  spoken  of 
wherever  books  then  made  their  way.  It  formed  a  taste 
for  these  studies  among  thinking  men;  and  the  fact  is 
greatly  to  the  author's  credit,  that  he  made  a  bold,  if 
fruitless,  attempt  to  deduce  the  law  of  life  from  bills  of 
mortality  which  did  not  record  the  ages  as  well  as  the 
deaths  of  the  people.  In  addition  to  the  London  bills, 
he  gave  one  for  a  country  parish  in  Hampshire;  and  in 
the  later  editions  he  added  one  for  Tiverton,  and  another 
for  Cranbrook.  Charles  II  recommended  the  Royal 
Society  to  elect  him  one  of  their  members,  charging  the 
Fellows  "that  if  they  found  any  more  such  tradesmen, 
they  should  admit  them  all";  and  immediately  after  the 
appearance  of  the  work,  Louis  XIV  ordered  the  most 


ORIGIN  OF  THEORY  53 

exact  register  of  births  and  deaths  to  be  kept  in  France, 
that  was  then  known  in  Europe.  A  few  extracts  from  this 
rare  and  curious  work  will  at  once  indicate  its  character, 
and  show  the  simplicity  of  the  existing  information; 
but  in  their  perusal  the  reader  will  do  well  to  consider, 
that  Graunt  was  the  first  who  wrote  on  the  subject;  that 
he  had  but  slight  foundations  for  his  calculations;  and  that, 
with  all  these  difficulties,  he  was  very  successful  in  his 
conclusions. 

From  an  enumeration  of  his  objects  it  may  be  seen  that 
life  assurance  was  not  contemplated  by  the  author  when 
his  important  book  was  written ;  but  as  the  earliest  attempt 
to  number  the  people,  to  classify  their  callings,  and  to 
ascertain  the  mortality  among  them,  he  assuredly  laid  the 
foundations  of  this  science.  His  book  gave  new  ideas.  It 
first  propounded  the  fact,  that  "the  more  sickly  the  years 
are,  the  less  fruitful  of  children  they  be";  and  though  this 
was  wonderfully  ridiculed,  time  has  proved  that  it  was  not 
less  strange  than  true.  It  formed  a  taste  for  similar  in- 
quiries among  thinking  men.  It  was  published  at  a  period 
when,  the  city  being  less  populous,  there  was  additional 
facility  in  arriving  at  certain  facts.  From  that  time  the 
subject  was  cultivated  more  and  more.  Increased  atten- 
tion was  paid  to  the  parish  registers.  The  different  dis- 
eases and  casualties  were  gradually  inserted;  but  it  was 
not  till  1728  that  the  ages  of  the  dead  were  introduced. 
Graunt  had  forced  people  to  think;  and  whatever  merit 
may  be  ascribed  to  Sir  William  Petty,  Daniel  King,  Dr. 
Davenant,  and  others,  it  may  all  be  traced  to  the  first 
observations  of  Graunt  on  the  Bills  of  Mortality.  To  him 
we  owe  the  care  with  which  parish  registers  have  since 
been  kept,  and  the  valuable  material  they  have  afforded 
to  the  science  of  political  economy. 

Contemporary  with  Graunt,  and  contributor  to  his 
attempts,  was  one  of  those  strange,  restless,  speculative 
men  whose  love  of  money  teaches  them  how  to  procure  it, 


54  YALE  READINGS  IN  INSURANCE 

and  whose  desire  to  preserve  it,  by  purchasing  land,  and 
leaving  their  heirs  in  possession,  makes  them  the  founders 
of  noble  English  houses.  This  was  Sir  William  Petty, 
who,  in  his  "Essay  on  Political  Arithmetick  concerning 
the  Growth  of  the  City  of  London,  with  the  Measures, 
Periods,  Causes,  and  Consequences  thereof,"  made  a 
further  onward  movement.  The  earlier  portion  of  his 
life  was  passed  in  battling  with  the  world.  He  was  as 
much  a  votary  of  mathematics  as  of  money,  and  was 
eminently  successful  in  both.  Although  only  the  son  of 
a  Romney  clothier,  he  was  the  founder  of  a  house  which  has 
exercised  an  important  influence  on  English  political  life 
—  the  House  of  Lansdowne.  He  began  his  career  with 
nothing,  and  he  closed  it  possessed  of  £15,000  per  annum. 
He  lived  at  a  time  when  social  economy  was  but  little 
regarded;  and  he  published  a  volume  which,  however 
uncertain  both  in  its  data  and  its  conclusions,  was  an 
attempt  to  apply  arithmetic  to  economics  of  life. 

He  wrote  "An  Essay  concerning  the  Growth  of  the 
City  of  London,"  "Observations  on  the  Dublin  Bills  of 
Mortality,"  "Two  Essays  concerning  the  People  of  London 
and  Paris,"  "Two  Essays  on  Political  Arithmetick";  and 
the  name  of  Sir  William  Petty  has  come  down  to  us  more 
as  the  author  of  these  works  than  as  the  successful  specu- 
lator, as  the  founder  of  the  Marquisate  of  Lansdowne,  or 
as  one  who  began  life  penniless,  and  left  a  princely  in- 
heritance. 

That  the  tables  of  Graunt  and  Petty  had  produced 
small  practical  effect,  and  that  little  or  nothing  was  known 
as  to  the  chances  of  life,  may  be  gathered  from  a  pamphlet 
printed  in  1680,  in  which  the  whole  doctrine  of  the  value 
of  the  life  as  then  understood  and  acted  on  is  affirmed: 
the  utmost  value  allotted  to  the  best  life  was  7  years,  at 
which  the  life  of  a  "healthful  man,"  at  any  age  between 
20  and  40,  was  estimated;  while  that  of  an  aged  or  sickly 
person  was  from  5  to  6  years,  the  various  limits  between 


ORIGIN  OF  THEORY 


55 


these  two  extremes  constituting  the  whole  range  of  dif- 
ference in  value. 

Such  was  the  limited  nature  of  the  statistics  of  life  when 
the  Astronomer  Royal,  Halley,  compiled  those  calcula- 
tions which  make  his  name  honored  by  directors  and 
actuaries.  To  him  we  owe  the  germ  of  all  subsequent 
developments  of  this  science,  in  that  general  formula  for 
calculating  the  value  of  annuities  which  is  yet  regarded 
with  so  much  respect. 

Up  to  the  period  in  which  he  lived  : —  the  latter  half  of 
the  seventeenth  century  —  the  town  of  Breslau,  in  Silesia, 
was  the  only  place  which  recorded  the  ages  of  its  dead; 
and  from  these  Halley  drew  a  table  of  the  probabilities  of 
the  duration  of  human  life  at  every  age.  This  was  in 
1693,  and  was  the  first  table  of  the  sort  ever  published.1 
In  it  he  taught,  with  great  clearness  and  exactness,  the 
conditions  needful  for  the  formation  of  rates  of  mortality; 
the  manner  of  forming  them  with  complete  geometrical 
precision ;  of  deducing  a  corresponding  table  of  the  present 
state  and  annual  movement  of  the  population;  of  reading 
in  them  the  probability  of  survivorship  of  any  person 

1  The  following  figures  will  give  some  idea  of  the  chances  of  life  as 
estimated  by  Dr.  Halley:  — 

Out  of  1000  born,  661  will  be  living  at  10  years  of  age. 


628 
598 
567 
531 
490 
445 
397 
346 
292 
242 
192 
142 
88 
41 
19 


15 
20 
25 
30 
35 
40 
45 
5,0 
55 
60 
65 
70 
75 
80 
84 


56  YALE  READINGS   IN  INSURANCE 

taken  at  random  in  a  given  society;  of,  in  truth,  conclu- 
ding upon  the  probable  duration  of  the  coexistence  of 
several  individuals  from  the  sole  knowledge  of  their  age. 
He  also  first  developed  the  true  method  of  calculating 
life  annuities,  taking  for  his  guide  the  rate  of  mortality 
during  five  successive  years  in  Breslau. 

That  the  tables  of  Dr.  Halley  were  very  much  wanted 
may  be  assumed,  as  in  1692  annuities  were  granted  on 
single  lives  at  14  per  cent.,  or  only  7  years'  purchase;  and 
that  the  state  took  very,  little  trouble  to  apply  these 
tables  is  as  true,  for  we  read  that,  soon  after  they  were 
published,  annuities  were  estimated  on  1  life  at  9  years' 
purchase,  on  2  lives  at  11  years',  and  on  3  lives  at  12  years' 
purchase.  Some  allowance  must,  of  course,  be  made  for 
the  difficulty  of  raising  money  and  the  difference  of  in- 
terest; still  the  price  paid  was  out  of  all  proper  proportion. 
But  the  most  singular  circumstance  connected  with  govern- 
rnent  annuities  at  this  period  is,  that,  when  life  annuities 
WCTC  changed  into  annuities  for  99  years,  the  owner  of  a 
life  annuity  might  secure  an  annuity  for  99  years,  by  pay- 
ing only  4^  years'  extra  purchase.  Thus,  by  the  payment 
of  15|  years'  purchase,  a  certain  annuity  of  99  years  could 
be  procured. 


CHAPTER  V 

HISTORY   OF  LIFE   INSURANCE   IN  GREAT  BRITAIN  l 

LIFE  assurance  is  the  compound  growth,  first,  of  our 
commercial  necessities,  aided  largely  by  a  love  of  specula- 
tion, and  later,  of  our  progressive  civilization.  For  the 
former,  rough  and  ready  means  of  estimation  were  re- 
sorted to;  for  the  latter,  a  long  and  elaborate  course  of 
progressive  investigation  was  needed. 

The  development  of  the  business  has  extended  over 
some  three  or  four  centuries,  perhaps  more.  It  has  passed 
through  three  distinct  phases,  as  (1)  The  experimental 
period;  (2)  The  speculative  or  transitional  period;  (3) 
the  period  of  scientific  exactitude.  These  periods,  of 
course,  more  or  less  overlap  each  other,  but  they  each 
possess  very  marked  distinctions. 

It  has  to  be  remarked  that  during  the  constantly  recur- 
ring epidemic  visitations  of  the  middle  ages,  anything 
depending  upon  the  duration  of  human  life  could  but  be  a 
lottery.  There  were  no  means  even  of  approximate 
estimate  other  than  tradition  could  supply.  Life  insur- 
ance, except  as  a  bet  or  hazard  between  two  or  more 
individuals,  was  therefore  impossible.  And  yet  it  was 
practised  to  an  extent  of  which  we  can  only  judge  by 
collateral  circumstances  —  one  of  these  being  the  exist- 
ence of  forms  of  contract  exactly  adapted  to  the  nature 
of  the  business.  These  early  contracts  were  indeed  based, 
alike  in  form  and  expression,  upon  those  adopted  in  marine 
insurance,  which,  it  is  generally  admitted,  had  an  earlier 
origin  than  that  claimed  for  life  insurance. 

!By  Cornelius  Walford,  F.I.A.  Reprinted  from  Volume  XXV, 
Journal  of  the  Institute  of  Actuaries. 

57 


58  YALE  READINGS  IN  INSURANCE 

The  class  of  life  insurance  chiefly  in  use  during  the 
experimental  period  was  that  of  assuring  mariners,  i.e., 
masters  of  ships,  against  death  or  captivity  during  the 
prosecution  of  their  voyage;  in  insuring  merchants  against 
captivity  by  pirates  —  for  in  early  times  merchants  accom- 
panied their  maritime  ventures.  The  mode  of  under- 
taking these  risks  was  by  individual  underwriters  taking 
certain  defined  portions  thereof  at  so  much  per  cent, 
premium. 

Again,  there  were  also  contracts  for  children's  endow- 
ments, and  various  other  contingent  risks,  specially  de- 
vised in  view  of  evading  the  usury  laws,  which  latter  were 
sought  to  be  strictly  enforced,  by  the  Romish  Church  in 
the  first  instance,  and  afterwards  by  enactments  in  our 
own  statute  book;  and  there  being  no  funded  system  of 
national  finance  in  existence  by  which  money  could  be 
steadily  improved  at  a  fixed  rate  of  interest,  until  near 
the  close  of  the  seventeenth  century  (1690), l  all  manner 
of  life  annuity  dealings  were  entered  into  as  a  means  of 
gain  and  investment. 

The  speculative  or  transitional  period  is  one  of  much 
interest.  All  subordinate  offices  in  the  service  of  the  state 
were  the  subject  of  sale  and  purchase  —  sale  by  the  patron, 
purchase  by  the  incumbent.  It  was  obvious  that  the 
value  of  a  "place  for  life"  depended  upon  the  age  of 
incumbents;  but  there  were  no  scientific  means  of  deter- 
mining this  proper  value. 

Church  lands,  and  houses  built  thereon,  were  granted 
upon  lives  —  "leases  for  lives"  -usually  three;  on  the 
death  of  the  last  of  which  the  property  reverted  to  the 
Church,  and  was  only  regranted,  if  at  all,  upon  the  pay- 
ment of  a  considerable  fine.  Life  insurance  was  much 
needed  to  render  such  transactions  financially  safe. 

Mutual  contribution  societies  were  founded;  and  in 
default  of  the  means  of  calculating  the  expected  mortality 

1  In  Venice  a  public  funding  system  was  brought  into  use  as  early  as 
1173.  In  Florence  in  1340. 


LIFE  INSURANCE  IN  GREAT  BRITAIN  59 

amongst  the  members,  but  little  regard  was  paid  to  age 
on  admission.  The  old  were,  indeed,  frequently  admitted 
on  the  same  terms  as  the  young,  or  where  a  distinction 
came  to  be  made  it  was  not  based  upon  principles  of  com- 
putation, but  was  simply  arbitrary;  and  various  expedients 
had  to  be  devised  to  meet  the  circumstance  that  nothing 
could  be  fixed  in  the  way  of  accruing  benefits. 

Many  annuity  societies  were  formed  in  various  parts  of 
the  kingdom;  but  in  the  absence  of  available  scientific 
data  on  which  to  base  their  operations,  they  proved  most 
delusive.  Reversionary  interests  could  not  be  accurately 
valued,  and  hence  were  the  subject  of  speculation  only. 
Even  schemes  of  national  finance  were  ventured  upon  in 
an  equal  absence  of  guiding  principles:  and  extravagant 
advantages  were  offered,  to  say  nothing  of  tontine  projects. 
Friendly  societies  were  founded  without  even  an  approxi- 
mate idea  of  the  pecuniary  equivalents  to  be  demanded  for 
the  benefits  offered.  Finally,  there  came  the  stage  of 
scientific  exactitude  in  the  progress  of  life  contingencies. 

Life  assurance  associations  could  now  undertake,  in 
return  for  certain  fixed  contributions,  to  guarantee,  on  the 
expiration  of  the  lives  respectively  insured,  certain  spe- 
cific advantages.  Such  associations  might  therefore  be 
founded  and  carried  on  either  by  trading  companies,  who 
entered  into  contracts  in  view  of  profit;  and  who,  from  the 
beginning,  possessed  funds  which  made  the  contract  cer- 
tain of  performance  in  the  absence  of  fraud.  Under  such 
conditions  life  insurance  could  be  advantageously  applied 
to  many  business  purposes,  wherein  the  element  of  cer- 
tainty was  the  one  thing  needed;  and  the  absence  of 
speculation  commended  it  to  the  judgment  of  prudent 
men,  as  a  means  of  making  provision  for  families. 

In  order  to  pass  from  the  first  of  the  preceding  stages 
to  the  last,  many  steps  had  been  necessary.  First,  in 
regard  to  the  abatement  of  pestilence;  steps  were  taken 
in  most  of  the  municipal  towns,  in  the  direction  of  clean- 
sing the  public  streets,  into  which  animal  and  vegetable 


60  YALE  READINGS  IN  INSURANCE 

refuse  and  other  abominations  had  been  heretofore  indis- 
criminately thrown.  As  to  the  metropolis,  which  usually 
suffered  more  severely  than  the  smaller  towns  from  plague 
visitations,  its  burning  in  1666  was  the  "baptism  of 
fire"  by  which  alone  it  became  purified,  and  rendered  even 
capable  of  its  future  development  as  the  capital  of  the 
kingdom. 

Bills  of  mortality  came  to  be  regarded  as  of  importance 
in  the  light  of  being  barometers  of  the  public  health. 
They  were  introduced  into  the  principal  towns  by  slow 
degrees;  and  their  results  were  placed  on  permament 
record.  From  the  bills  so  kept  were  afterwards  deduced 
the  true  data  for  life  measurement. 

The  laws  of  chance  came  to  be  developed,  originally 
very  much  in  the  interest  of  the  all-prevailing  gaming 
which  pervaded  Europe  during  the  seventeenth  and  most 
of  the  eighteenth  entury.  A  yet  higher  class  of  mathe- 
matics soon  afterwards  elaborated  the  doctrine  of  mathe- 
matical probability.  The  application  of  these  higher 
mathematical  methods  to  the  data  supplied  by  the  bills 
of  mortality  and  other  mortality  observations  led  to  the 
development  of  the  science  of  life  contingencies. 

The  first  mortality  table  scientifically  constructed,  by 
means  of  which  the  probable  duration  of  human  life  could 
be  accurately  computed,  was  prepared  by  Halley,  the 
Astronomer  Royal  of  England,  and  submitted  to  the 
Royal  Society  in  1622. 

It  seems  necessary  to  state  that  Halley's  table  did  not 
immediately  lead  to  an  adoption  of  the  improved  methods 
of  computation  which  it  made  available.  This  was  prob- 
ably because  its  results  were  deduced  from  foreign  obser- 
vations, which  it  may  have  been  thought  did  not  apply 
to  life  in  England. 

Attempts  were  therefore  made  during  the  next  century 
to  construct  other  tables  based  upon  English  observations 
—  especially  upon  those  of  London ;  and  afterwards  upon 
those  of  the  central  town  of  Northampton. 


LIFE  INSURANCE  IN  GREAT  BRITAIN  61 

From  the  accomplishment  of  this  last  result  by  Dr. 
Price  in  1769  .dates  what  may  be  termed  a  general  adop- 
tion of  life  assurance  for  its  best  and  noblest  purposes. 

This  preliminary  survey  of  the  stages  through  which 
life  assurance  has  passed  in  its  course  to  perfection  is 
made  with  the  view  of  preparing  the  mind  for  a  more 
comprehensive  review  of  the  facts  which  are  to  follow. 
Stated  generally,  the  progress  has  been  a  threefold  one  — 
juridical,  as  applied  to  the  form  of  the  contract  and  its 
construction;  mathematical,  as  applied  to  the  assump- 
tions of  the  law  of  mortality,  and  the  correct  deduction 
of  the  financial  elements;  social,  as  securing  the  con- 
fidence necessary  for  its  extended  use  as  a  branch  of 
domestic  economy. 

In  1622,  Gerard  de  Malynes,  merchant  in  London,  pub- 
lished his  famous  work,  Vel  Lex.  Mercatoria,  or  the  Antient 
Law  Merchant,  &c.,  which  contains  a  chapter  "of  the 
Office  of  Assurances,  and  the  antient  custom  of  the  same"; 
and  the  nature  of  the  assurances  there  made  is  described 
in  much  detail.  Inter  alia: 

"Other  assurances  are  made  upon  the  lives  of  men  for 
divers  respects;  some  because  their  estate  is  merely  for 
term  of  life,  and  if  they  should  have  children  or  friends 
to  leave  some  part  of  their  estate  unto,  they  value  their 
life  at  so  many  hundredth  pounds;  and  if  he  do  depart 
this  life  within  that  time  the  assurers  pay  the  money: 
as  it  happened  of  late  that  one  being  engaged  for,  Sir 
Richard  Martin,  Knight,  Master  of  the  Mint,  caused  £300 
to  be  assured  upon  the  life  of  the  said  Sir  Richard, 
being  some  90  years  of  age,  and  therefore  gave  twenty- 
and-five  per  centum  to  the  assurers.  The  antient  knight 
died  within  the  year,  and  the  said  assurers  did  pay  the 
money." 

Here  is  the  earliest  mention  of  life  assurance  being 
employed  as  a  provision  for  families.  The  first  portion 
of  the  paragraph  is  rather  involved,  and  probably  describes 


62  YALE  READINGS  IN  INSURANCE 

two  modes  of  insurance  practised  at  that  period  and  long 
before:  1.  A  man  going  into  foreign  parts,  say  on  a  re- 
ligious pilgrimage,  having  more  money  than  was  required 
for  his  purpose,  lent  sums  to  his  friends  upon  the  con- 
dition that  they  paid,  say,  twofold  on  his  return.  They 
underwrote  his  life,  to  secure  such  a  sum  of  money  as 
would  be  required.  2.  A  merchant  going  on  a  trading 
expedition  borrowed  money  of  his  friends  upon  the  con- 
dition of  repaying  twofold  the  amount  on  his  coming 
back.  He  might  be  required  to  insure  a  sum  in  case  of 
his  failure  to  return;  or  he  might  offer  to  do  this  himself, 
so  as  to  secure  the  advance  upon  easier  terms. 

In  1693  that  ingenious  computer  Leybourne,  in  his 
Panarithmologia  —  "a  sure  guide  for  purchasers,  sellers 
or  mortgagers  of  land,  leases,  annuities,  rents,  pensions, 
etc.,  in  present  possession  or  reversion"  —describing  the 
branches  of  insurance  which  then  prevailed,  said:  "Other 
assurances  are  made  upon  the  lives  of  men  and  women, 
at  a  rate  that  is  moderate.  For  by  this  means,  if  you  buy 
any  place  or  office  that  is  worth  £1000  or  more,  or  less, 
and  you  have  not  money  enough  to  purchase  it,  you  borrow 
£400  or  £500.  Now  if  you  die,  and  are  not  in  a  condition 
to  pay  this  money,  it  is  lost:  but  if  you  insure  your  life, 
then  your  friend  that  you  did  borrow  of  will  have  his 
money  honestly  paid  him." 

Thus  far  all  had  been  speculation  and  darkness.  A  new 
period  takes  its  rise  with  the  first  efforts  towards  true  light. 

It  is  one  of  the  most  remarkable  features  in  the  history 
of  life  assurance,  that  at  the  very  moment  when  the  busi- 
ness could,  for  the  first  time,  have  emerged  from  the  reign 
of  experiment  into  the  more  satisfactory  path  of  something 
like  mathematical  certainty  —  at  that  moment  the  course 
of  events  led  it  into  a  channel  almost  purely  speculative. 
This  was  probably  due  to  the  temper  of  the  times  rather 
than  to  any  other  single  cause.  It  is  certain  that  the 
first  step  towards  associated  operation  was  intended  to  be 
respectable,  although  its  basis  was  not  very  substantial; 


LIFE  INSURANCE  IN  GREAT  BRITAIN  63 

it  is  equally  clear  that  the  movement  of  1706  was  intended 
to  be  in  the  direction  of  permanence;  but  it  will  be  made 
too  apparent,  as  we  proceed,  that  the  very  attractiveness 
of  the  features  of  the  business  seemed  to  render  it  the  prey 
then,  as  it  has  done  since,  to  a  band  of  most  unscrupulous 
adventurers.  It  seems  of  the  utmost  consequence  that 
the  events  of  this  period  should  be  carefully  surveyed; 
without  this,  no  deductions  can  be  drawn  which  will  be 
permanently  reliable. 

The  earliest  project  of  associated  life  assurance  was 
made  in  1699.  It  was  called  "The  Society  of  Assurance 
for  Widows  and  Orphans."  Its  founder  was  Mr.  Stans- 
field,  "at  St.  Austin's  Gate,  near  the  east  end  of  St.  Paul's, 
London."  The  association  was  to  consist,  "when  full," 
of  2000'  members,  who  were  to  contribute  five  shillings 
each  towards  every  death  that  occurred  among  the  mem- 
bers, this  contribution  being  designed  to  raise  £500  on  the 
death  of  each  member,  contingent  upon  all  members  pay- 
ing up.  I  will  give  a  brief  outline  of  the  main  provisions 
of  its  "Articles  of  Settlement." 

The  scheme  was  to  commence  as  from  6th  April,  1699, 
to  be  kept  in  some  public  place  in  the  city  of  London;  two 
register  books  were  to  be  provided  and  kept  in  the  said 
office  —  one  for  entering  the  name  and  age  of  every  sub- 
scriber, and  the  names  and  ages  of  his  wife  and  children, 
or  of  any  other  person  or  persons  to  be  provided  for;  and 
the  other  for  entering  the  claim  of  every  widow,  or  of 
every  orphan  or  orphans,  person  or  persons,  made  upon 
the  society,  and  the  sum  or  sums  of  money  paid  upon 
every  claim.  These  books  to  be  open  to  the  examination 
of  subscribers.  All  claims  and  matters  relating  to  the 
"Society"  were  to  be  heard  and  determined  by  thirteen 
persons,  who  were  named,  and  who  were  all  persons  of 
good  social  position,  as  clergymen,  etc.  They  were  to  be 
trustees  for  the  year.  Any  three  of  them  might  hold  a 
"court"  for  admission  of  subscribers,  and  any  five  of 
them  for  determination  of  other  matters,  being  lawfully 


64  YALE  READINGS  IN  INSURANCE 

summoned  by  the  "Master  of  the  said  Office."  Vacancies 
might  be  filled.  Trustees  to  be  appointed  every  year  by 
the  votes  of  the  subscribers. 

Every  subscriber,  on  registering  his  name  and  the  names 
of  those  for  whose  benefit  the  assurance  was  to  be  made, 
was  to  pay  5s.  for  entrance,  and  5s.  more  to  meet  the  next 
claim;  and  should  these  have  a  policy  under  the  seal  of 
this  office,  nominees  might  be  named,  and  from  time  to 
-time  changed,  for  all  benefits  under  the  policy.  Policies 
might  be  changed  on  paying  the  cost  of  stamp.  In  case 
of  death,  timely  notice  to  be  sent  to  this  office,  tJiat  its  "  Visi- 
tor" might  see  the  person  deceased.  An  affidavit  of  death 
to  be  made  by  parties  interested  in  the  policy,  supported 
by  a  certificate  of  death  under  the  hands  of  the  minister 
and  churchwardens  of  the  parish,  or  of  three  substantial 
housekeepers. 

Persons  on  entering  were  to  sign  the  deed,  and  within 
six  months  were  to  appear  at  the  office  before  three  or 
more  trustees,  and  have  their  policies  approved  and  signed 
by  the  secretary  in  their  presence;  at  which  court  every 
subscriber  should,  if  required  by  the  trustees,  or  by  the 
master  of  the  office,  produce  certificate  of  his  age,  and  also 
an  affivadit  that  he  had  not  any  known  distemper  upon  him, 
and  that  he  was  in  a  very  good  state  of  health,  and  the  trustees 
should  have  power  to  refuse  the  person  if  it  appeared  he 
was  sickly  and  infirm,  or  did  not  produce  the  certificate, 
or  that  in  any  other  respect  he  was  not  qualified  for  mem- 
bership. Any  person  of  the  clergy  or  laity,  "excepting 
such  as  live  in  the  marshy  and  unhealthy  parts  of  England," 
might  be  admitted  by  proxy,  if  known  to  some  of  the 
trustees,  or  to  the  master  of  the  office,  or  to  some  two 
subscribers  or  substantial  housekeepers  living  within  the 
bills  of  mortality,  as  a  person  of  good  report;  also  not 
above  50  years  of  age,  as  also  a  certificate  signed  by  the 
ministers  of  three  neighboring  parishes,  testifying  that  they 
did  believe  him  to  be  in  health,  and  of  such  an  age  as  he 
declared  himself  to  be.  All  members  being  outside  the 


LIFE  INSURANCE  IN  GREAT  BRITAIN  65 

bills  of  mortality  to  have  a  proxy  to  pay  contributions 
and  quarterages. 

There  was  a  stringent  provision  against  personation, 
and  in  the  case  of  persons  who  had  become  members 
becoming  soldiers  and  dying  in  warfare,  or  dying  at  sea, 
or  in  foreign  parts,  all  interest  in  the  society  and  its  funds 
was  to  be  forfeited. 

There  were  well-considered  provisions  for  giving  notice 
of  and  getting  in  contributions.  On  the  death  of  any 
person  after  six  months'  membership,  the  master  to  be 
ordered  to  pay  £500,  abating  a  proportionate  amount  if 
there  were  not  the  full  2000  members;  also  deducting 
3  per  cent,  towards  defraying  charge  of  office.  The  master 
of  the  office  to  settle  the  value  of  £1000  in  ground  rents 
as  guarantee  of  fidelity.  The  remuneration  of  the  master 
of  the  office  was  to  be  Is.  quarterly  from  each  subscriber, 
the  5s.  entrance  fee,  and  the  3  per  cent,  deduction  from 
the  death  claim. 

Any  subscriber  not  paying  contributions  within  seven 
days  after  notice  to  lose  all  benefit  in  his  previous  pay- 
ments, and  his  policy  to  be  canceled.  But  members  might 
by  a  deposit  of  money  provide  for  future  contributions 
and  have  account  rendered.  Subscribers  dying  by  hands 
of  justice  to  forfeit  all  contributions  made. 

Mr.  Stansfield,  the  master  of  the  office,  was  to  have  full 
power  to  control  the  office  and  regulate  the  staff;  also  to 
alter  the  regulations,  subject  to  the  approval  of  the  trus- 
tees. 

The  number  of  subscribers  did  not  get  completed  very 
rapidly.  In  1704  there  were  600  members;  in  1705  there 
were  908;  in  1707  the  number  had  increased  to  1,104;  and 
early  in  the  working  of  the  scheme  the  age  of  entry  was 
reduced  from  50  to  45.  Notice  of  the  change  was  given, 
with  this  further  condition:  "When  the  Society  shall 
consist  of  1200,  it  is  designed  to  be  reduced  to  40;  when 
of  1600,  to  35;  when  it  is  full,  to  30  years  of  age." 


66  YALE  READINGS  IN  INSURANCE 

This  was  the  first  of  the  mutual  contribution  life  offices. 
It  seems  desirable  to  call  attention  to  the  fact  that  all  the 
essential  conditions  of  life  assurance  were  here  provided 
for.  The  lives  were  to  consist  of  persons  in  good  health, 
and  not  over  a  specified  age;  persons  whose  social  position 
enabled  them  to  be  identified.  Military,  naval,  and  sea- 
faring risks  were  excluded,  and  also  deaths  by  the  hands 
of  justice.  There  was  to  be  a  probationary  period  (six 
months)  within  which  if  death  took  place  there  should 
be  no  claim.  This  last  regulation  was  to  compensate  for 
the  absence  of  medical  examination  —  a  practice  intro- 
duced at  a  later  date. 

In  the  following  year  (1700)  the  same  Mr.  Stansfield 
founded  another  and  similar  association,  which  became 
designated  The  Second  Society  of  Assurance  for  Widows 
and  Orphans.  This  was  to  consist  of  1000  members  only, 
hence  the  sum  to  be  raised  on  each  death  could  not  exceed 
£250.  The  entrance  and  other  fees  were  to  be  less  than 
in  the  other  society.  No  claims  were  to  be  paid  until 
"there  be  actually  £250  in  the  joint  stock."  Operations 
were  not  to  commence  formally  until  there  were  600  sub- 
scribers. The  general  regulations  were  much  the  same 
as  in  the  former  case;  but  the  nominee  feature  was  ex- 
panded, by  adding  powers  for  changing  them,  etc.  The 
master  of  the  office  was  to  give  security  in  ground  rents 
to  the  value  of  £500,  to  secure  a  sum  sufficient  to  have 
always  £250  in  hand  to  pay  claims.  The  reasons  for 
starting  this  second  society  are  very  obscurely  stated  - 
for  instance,  it  was  started  to  be  a  means  to  help  to  fill 
up  the  first!  Strong  inducements  were  held  out  to  join 
early,  as  afterwards  the  younger  ages  would  be  selected 
in  preference  to  the  higher  ones.  It  was  thought  some 
would  join  both.  "The  first  society,  which  has  already 
made  a  considerable  progress,  has  supply'd  several  widows, 
and  is  ready  to  answer  all  claims  that  may  happen." 
Among  the  twelve  promoters  there  were  three  doctors  of 
divinity.  The  two  societies  worked  on  side  by  side  for 


LIFE  INSURANCE  IN  GREAT  BRITAIN  67 

some   years,    and   then   suddenly  disappeared   from   the 
scene  —  eclipsed,  probably,  by  a  later  creation. 

We  now  arrive  at  the  period  of  the  formation  of  the 
fourth  mutual  contribution  life  office  established  in  London.  s 
This  was  designated  the  Amicable  Society  for  a  Perpetual 
Assurance;  and  it  was  destined,  if  not  to  be  perpetual,  to 
live  long  enough  to  become  famous.  It  differed  in  some 
material  respects  from  its  predecessors,  the  chief  dis- 
tinction being  that  the  contribution  to  its  funds  was  fixed 
at  £6  4s.  per  annum.  The  first  2000  members  to  pay, 
in  addition,  5s.  to  the  registrar  and  5s.  to  the  joint  stock 
of  the  office;  and  all  subsequent  members  were  to  pay 
10s.  to  the  joint  stock.  The  founder  and  the  registrar  of 
the  society  was  John  Hartley;  and  he  was  to  receive,  per- 
manently, Is.  per  quarter  out  of  each  contribution. 

The  plan  of  working  was  this;  the  number  of  members 
was  to  be  2000.  Amongst  those  who  died  in  the  first 
year  one-sixth  of  the  total  contributions  was  to  be  divided; 
in  the  second  year,  if  the  full  number  of  members  were 
enrolled,  £4000  was  to  be  divided;  in  the  third  year, 
£6000;  in  the  fourth,  £8000;  in  the  fifth,  £10,000;  and 
so  on  forever  afterwards  —  with  a  proportionate  reduc- 
tion if  the  full  number  of  members  were  not  enrolled. 
The  full  contribution  from  the  complete  roll  of  members 
would  be  £12,000  per  annum;  the  undivided  surplus  was 
to  accumulate  together  with  the  proceeds  from  the  sale 
of  annuities  —  a  new  feature  in  life  assurance.  The  un- 
certain element  was  the  amount  that  would  be  realized 
for  the  fixed  contribution.  This  depended  entirely  upon 
the  number  of  deaths  during  the  year,  the  sum  appro- 
priated for  annual  division  being  equally  divided  by  the 
number  of  deaths.  Each  person  had  an  interest,  there- 
fore, in  recommending  none  but  healthy  lives.  There 
was  no  limitation  of  age  for  membership  in  the  first 
instance;  but  the  court  had  the  power  of  rejection.  Can- 
didates for  admission  attended  before  the  committee,  and 
were  put  through  a  species  of  cross-examination  as  to 


68  YALE  READINGS  IN  INSURANCE 

health,  habits,  etc.  There  was  no  medical  examination. 
There  were  powers  to  change  nominees.  The  original 
subscribers  were  men  of  good  social  position,  and  by 
their  influence  obtained  in  the  following  year  a  charter 
of  incorporation  from  Queen  Anne.  This  charter  author- 
ized the  commencement  of  business  as  from  March  25, 
1706.  The  association  had  been  formed  in  the  preceding 
year. 

The  number  of  subscribers  during  the  first  year  was 
875,  of  whom  29  died  —  a  very  heavy  mortality;  only 
£875  was  divided,  the  proportion  of  each  being  therefore 
£30  3s.  8d.  only.  In  the  second  year  the  full  2000  sub- 
scribers were  enrolled,  96  died,  and  the  share  of  each  was 
£41  13s.  4d.  Third  year,  full  number  being  made  up  by 
new  entrants;  122  members  died,  and  the  £6000  divided 
gave  £50  3s.  6Jd.  per  share.  In  the  fourth  year  only 
87  deaths;  share  of  funds,  £91  19s.  OfcL  At  that  time 
the  accumulated  stock  had  reached  £25,000,  and  the  stipu- 
lated £10,000  was  henceforth  annually  divided  amongst 
the  nominees  of  deceased  members. 

This  mode  of  working,  which  was  financially  safe,  con- 
verted the  society  into  a  species  of  mortuary  tontine, 
except  that  the  smaller  the  number  of  subscribers  dying 
in  each  year  the  better  for  their  nominees.  The  heavy 
mortality  of  the  first  three  years  —  the  result  of  an  undue 
anxiety  to  fill  up  the  regulation  number  —  combined  with 
the  absence  of  limit  of  age  and  medical  selection,  caused 
the  speculation  to  be  a  very  poor  one  for  the  representa- 
tives of  those  who  died.  The  established  tariff  for  life 
assurance  amongst  the  underwriters  at  Lloyd's  and  else- 
where, who  undertook  life  risks,  was,  and  long  had  been, 
£5  per  £100  for  one  year;  here  they  had  paid  more  and 
received  much  less!  At  a  later  period,  the  age  of  member- 
ship was  limited  to  between  12  and  55  years  of  age. 

The  Amicable  had  no  sooner  become  established  than 
it  was  in  conflict  with  the  Society  of  Assurance  for  Widows 
and  Orphans.  It  was  one  of  those  open,  old-fashioned 


LIFE  INSURANCE  IN  GREAT  BRITAIN  69 

fights,  wherein  each  said  the  worst  it  could  of  its  oppo- 
nents, without  resorting  to  actual  abuse.  The  idea  of 
being  "perpetual"  was  greatly  ridiculed  by  the  earlier 
society.  "Perpetual  is  too  great  for  any  human  under- 
taking, and  especially  for  one  of  this  nature.  This  must 
be  granted  if  we  consider  the  frailties  and  vices  of  men, 
the  hazard  that  lies  in  employing  a  great  stock  in  order 
to  improve  it;  the  tricks,  the  fraudulent  combinations  and 
practices  which  companies  and  societies  are  liable  to  when 
the  temptation  is  great."  Some  of  these  predictions 
were  in  part  realized  a  few  years  later  when,  in  1713,  Mr. 
Hartley,  the  principal  officer  of  the  society,  absented 
himself  with  some  £6500  of  its  funds.  This  event  caused 
great  inconvenience  and  loss  of  repute  to  the  society,  and 
was  not  its  only  early  misfortune.  It  turned  out  that 
some  portions  of  the  funds  of  the  society  were  invested 
in  lottery  tickets  in  (I  assume)  the  state  lotteries  of  1710 
and  1712.  Before  these  events,  in  1711,  several  of  the 
policies  of  the  society  were  offered  for  sale.  This  was 
probably  the  first  instance  of  the  sale,  or  attempted  sale, 
of  a  life  policy.  There  is  no  record  of  the  price  realized. 
Later  still,  insurance  brokers  advertised  that  they  desired 
to  buy  policies  in  the  society. 

It  is  not  my  purpose  to  follow  the  detailed  history  of 
this  association  through  the  entire  160  years  during 
which  it  carried  on  business,  until  in  1866  it  was  merged  />' 
into  the  Norwich  Union  Life  Office,  under  the  authority 
of  Parliament.  The  idea  is  rather  to  trace  the  growth 
of  the  successive  institutions  founded  for  carrying  on  the 
business  of  life  assurance,  and  indicate  their  progressive 
and  fundamental  differences.  In  that  manner  the  growth 
and  development  of  the  business  may  be  sufficiently  seen. 

In  1707  there  was  projected  by  Mr.  Charles  Povey  (a 
name  that  will  always  be  remembered  in  insurance  annals    / 
as  the  founder  of  the  Sun  Fire  Office,  and  the  advocate  of 
numerous  other  projects),  a  scheme  of  life  assurance,  under 


70       YALE  READINGS  IN  INSURANCE 

the  title  of  The  Proprietors  of  the  Traders1  Exchange 
House. 

In  1708  elaborate  "proposals"  were  put  forth  in  view 
of  establishing  a  "Perpetual  Assurance  Office,  by  a  volun- 
tary subscription  of  two  thousand  persons  who,  for  cer- 
tain annual  payments  into  a  joint  stock  during  their 
lives,  may  and  will  secure  to  themselves,  or  to  any  person 
or  persons  they  shall  name  (at  or  before  their  respective 
deaths),  such  advantageous  sum  or  sums  of  money  as  are 
hereafter  expressed." 

All  through  the  years  1708-20  the  newspapers  teemed 
with  advertisements  of  projected  schemes  of  insurance, 
of  which  but  comparatively  few  addressed  themselves  to 
life  assurance  alone. 

The  year  1720  is  a  memorable  one  in  English  history. 
It  is  hardly  less  so  in  life  assurance  history.  An  atmos- 
phere of  speculation  had  pervaded  the  metropolis  from  the 
commencement  of  the  century.  In  the  crude  life  assur- 
ance project  of  1699  a  new  mode  of  aggregating  wealth 
had  been  propounded.  The  notion,  having  taken  hold 
of  the  public  mind,  was  skilfully  but  unscrupulously 
worked  by  projectors  of  new  schemes.  Each  year  more 
attractive  projects  were  put  forward.  The  very  unsound- 
ness  of  the  schemes  enabled  unscrupulous  persons  to 
realize  promptly  by  putting  forward  for  assurance  un- 
healthy lives.  In  a  mutual  contribution  society,  the 
managers  have  no  special  reason  (apart  from  motives  of 
honor)  to  object  to  the  introduction  of  lives  of  the  worst 
class.  They  receive  the  entrance  fees  and  the  percentage 
deduction  from  the  claims;  the  more  that  enter,  the  more 
the  managers  make  personally,  as  the  subscribers  them- 
selves pay  the  claims;  the  more  claims  that  are  paid,  the 
more  rapidly  contributors  come  in.  Time  alone  can  dis- 
pel the  illusion. 

The  movement,  now  inaugurated,  of  founding  joint- 
stock  insurance  companies,  shows  that  the  earlier  system 
was  becoming  exploded.  The  merits  of  life  assurance 


71 

were  growing  increasingly  apparent.  The  people  now 
said,  —  give  us  solid  institutions  to  insure  in.  Hence  the 
two  projects  of  1719;  hence  also  several  other  attempts 
in  the  early  months  of  this  year :  for  instance, 

1.  A  Copartnership  for  Insuring  and  Increasing  Chil- 
dren's Fortunes,  held  at  the  Fountain  Tavern. 

2.  Symond's  Assurance  on  Lives. 

3.  Baker's    Second    Edition    of    Assurance    on    Lives. 
(The  first  was  a  scheme  of  annuities.) 

4.  Le  Brun's  Marriage  and  Widows'  Assurance  Company. 
Simultaneously  with  the  life  assurance  projects   here 

already  enumerated,  there  had  been  projected  hundreds 
of  other  insurance  schemes  and  of  joint  stock  enterprises, 
altogether  apart  from  assurance,  almost  from  the  com- 
mencement of  the  century.  One  of  these  outside  projects 
—  outside  insurance,  I  mean  —  was  the  South  Sea  Com- 
pany, founded  in  1710,  for  the  assumed  purposes  of  trade 
and  emigration.  The  stock  in  this  company  became  a 
favorite  one  with  speculators,  and  had  gradually  risen 
to  an  enormous  degree  of  inflation  from  par  (£100)  to 
over  £800.  Many  circumstances  seem  to  point  to  the 
fact  that  money  made  in  insurance  projects  passed  into 
South  Sea  stocks,  certainly  some  of  the  young  assurance 
offices  invested  their  members'  money  in  these  stocks,  and 
advertised  that  they  had  done  so.  I  am  disposed  to  think 
that  the  promises  of  some  of  the  later  assurance  societies 
enumerated  were  founded  upon  the  results  of  past  opera- 
tions, and  a  belief  that  such  opportunities  would  be  con- 
tinued. To  what  precise  extent  the  various  projects  of 
this  eventful  period  were  interlaced,  it  is  now  impossible 
fully  to  unravel.  Certain  it  is  that  with  the  bursting  of 
the  South  Sea  bubble  every  one  of  the  life  assurance  pro- 
jects of  which  I  have  already  given  a  record,  with  the 
single  exception  of  the  Amicable  (1706),  passed  into  thin 
air  and  were  heard  of  no  more. 

By  way  of  adding  to  the  confusion  of  the  period  (al- 
though not  so  intended)  there  came  the  passing  of  the 


72  YALE  READINGS  IN  INSURANCE 

"Bubble  Act"  —6  George  I,  Chapter  18  — "An  Act  for 
the  Suppression  of  Bubble  Companies,"  which  recited 
(Section  18),  "Whereas  it  is  notorious  that  several  under- 
takings or  projects  of  different  kinds  have  at  some  time  or 
times  since  24  June,  1718,  been  publicly  contrived  and 
practiced,  or  attempted  to  be  practiced  within  the  City 
of  London  and  other  parts  of  the  kingdom  and  also  in 
Ireland,  and  other  His  Majesty's  Dominions,  which  mani- 
festly lend  to  the  common  grievance,  prejudice,  and  in- 
convenience of  great  Nos.  of  your  Majesty's  Subjects,  in 
their  trade  or  commerce  and  other  their  affairs;  and  the 
persons  who  contrive  or  attempt  such  dangerous  and  mis- 
chievous undertakings  or  projects  under  pretence  of  the 
public  good,  do  presume  according  to  their  own  devices 
to  open  books  for  public  subscriptions,  and  draw  in  many 
unwary  persons  to  subscribe  therein,  towards  raising  great 
sums  of  money;  .  .  .  and  whereas  in  many  cases  the 
said  undertakers  or  subscribers  have  since  the  said  24  June, 
1718  presumed  to  act  as  if  they  were  corporate  bodies,  and 
have  pretended  to  make  their  shares  or  stocks  transferable 
or  assignable,  without  any  legal  authority  either  by  Act  of 
Parliament,  or  by  any  Charter  from  the  Crown  for  so 
doing.  ..."  It  was  therefore  enacted  that  all  such 
undertakings  and  all  subscriptions  thereto  should,  from 
and  after  24  June,  1720,  be  deemed  illegal  and  void.  The 
effect  of  this  measure  was  to  kill  the  more  solid  of  the 
later  insurance  associations  —  those  that  had  a  capital 
at  their  back  —  in  favor  of  other  weaker  associations 
which  had  no  legal  status  to  support  them,  and  which 
would  almost  necessarily  succumb  in  the  panic  which  pre- 
vailed. 

I  have  tried  to  estimate  the  extent  of  the  dealings  of 
the  many  mutual  contribution  life  assurance  offices  which 
passed  out  of  sight  in  the  year  1720.  It  is  not  possible 
to  define  the  amount  of  assurances  they  had  in  force. 
That  in  the  nature  of  the  case  was  always  an  unknown 
quantity.  We  can  only  estimate  the  aggregate  of  the 


LIFE  INSURANCE  IN  GREAT  BRITAIN  73 

contributions,  as  against  the  aggregate  returns  made  by 
the  offices  to  their  subscribers;  the  balance  constitutes 
the  loss  to  the  public.  There  had  probably  been  some 
fifty  life  assurance  schemes  set  on  foot  between  1699  and 
1720.  Of  about  forty  of  these  I  have  already  given  a 
more  or  less  detailed  account.  Some  "entered  lives" 
by  thousands,  and  others  by  hundreds  only.  Some  lived 
for  many  years,  others  for  very  few.  If  we  estimate  the 
average  duration  to  have  been  five  years,  and  the  average 
receipts  in  the  way  of  entrance  payments,  contributions 
towards  claims  and  to  the  management,  at  £5000  each  (a 
very  small  estimate  in  view  of  scattered  facts  learned 
during  my  investigations),  we  have  a  total  of  £250,000  — 
which,  at  the  current  rate  of  £5  per  £100,  would  have 
insured  five  millions  sterling.  Probably  two-fifths, 
£100,000,  of  the  contributions  had  been  returned  in  the 
way  of  claims,  etc.,  leaving  the  loss  to  the  public  at 
£150,000. 

We  commence  our  third  epoch  with  the  year  1721,  and 
with  the  fact  that  there  was  at  that  period  but  one  life 
assurance  office  in  existence  in  Great  Britain  —  the  Ami- 
coble,  founded  1706.  That  too,  so  far  as  we  have  the  means 
of  knowing,  was  the  only  life  assurance  association  in  the 
world.  It  was  very  defective  in  its  mode  of  working,  at 
the  best;  but  it  stood  alone.  The  society  had  at  this 
date  an  accumulated  fund  of  about  £50,000;  it  had  dis- 
tributed in  death  claims  £118,000.  Thus  it  had  obtained 
a  solid  hold  upon  public  confidence,  but  I  suspect  its 
business  suffered  considerably  from  the  general  shock 
to  public  credit.  The  days  of  mutual  contribution  life 
assurance  associations,  as  such,  were  gone  forever  in 
England.  This  society  had  to  take  steps  to  mitigate  the 
element  of  uncertainty,  or  it  would  most  probably  have 
died  out.  Solidity  was  now  the  one  thing  sought  for. 

The  solitary  survivor  was  not  long  to  remain  in  undis- 
turbed possession  of  the  field.  In  the  June  of  the  pre- 
ceding year  there  had  been  founded,  under  very  special 


74  YALE  READINGS  IN  INSURANCE 

circumstances,1  two  powerful  corporations  for  the  trans- 
action of  marine  insurance  business  —  the  London  Assur- 
ance Corporation,  and  the  Royal  Exchange  Assurance 
Corporation.  On  the  29th  April,  this  year  (1721),  they 
each  obtained  additional  legal  powers,  whereby  they  were 
enabled  to  accept  life  assurance  risks,  on  the  ground  that 
it  had  been  found  advantageous  for  persons  having  offices 
and  employments  to  effect  assurances  on  their  own  lives 
and  those  of  others. 

Each  of  these  corporations,  under  the  powers  of  their 
additional  charters,  commenced  to  issue  life  policies. 

Life  assurance  as  a  domestic  institution,  if  not  actually 
killed  by  the  events  of  1720,  was  thrown  back  at  least  one 
full  generation.      By  what  processes  it  became  revived 
be  our  next  purpose  to  trace. 

In  1725  De  Moivre  published  his  work,  Annuities  upon 
Lives:  or  The  Valuation  of  Annuities  upon  any  number  of 
Lives,  as  also  of  Reversions.  To  which  is  added  an  Appendix 
concerning  the  Expectation  of  Life,  and  Probabilities  of 
Survivorship.  In  this  work  he  propounded  a  method  of 
calculating  annuity  values  on  a  much  simpler  process  than 
that  which  Halley  had  adopted.  This  proposal  afterwards 
became  developed  into  what  is  known  to  actuaries  as  "  De 
Moivre's  Hypothesis":  consisting  of  the  assumption  that 
any  specified  number  of  persons  born  would  be  subse- 
quently decreased  from  age  to  age,  by  some  uniform 
number  of  deaths.  From  this  it  was  evident  that  as 
the  number  of  deaths  was  supposed  to  be  invariable,  so 
such  number  would  annually  be  in  greater  proportion  to 
the  diminishing  number  of  survivors,  and  thus  consis- 
tently represent,  at  successive  ages,  a  yearly  decrease  in 
,  the  probabilities  of  life. 

In  1726  John  Smart  published  the  large  edition  of  his 
well-known  Interest  Tables,  to  which  he  appended  a  few 
/remarks  on  annuities  upon  lives. 
ff       A  small  edition  of  Smart's  tables  had  been  published 

1 1  do  not  recount  the  circumstances  here;  they  are  so  widely  known. 


LIFE  INSURANCE  IN  GREAT  BRITAIN  75 

as  early  as  1707.  Herein  he  gave  what  may  be  termed 
a  hypothetical  table  of  mortality  for  London  —  the  first 
of  its  kind.  ~~1 

In  1727  Richard  Hayes  published  A  New  Method  of 
Valuing  Annuities  on  Lives.  It  has  been  previously  noted, 
that  to  him  appears  to  be  due  the  origination  of  the  "whole- 
term"  assurance  principle.  He  puts  for  solution  the  case 
"To  provide  for  a  family:  A  clergyman  or  layman,  aged 
47  years,  holding  a  benefice  or  place  during  life,  and  having 
a  family,  would  willingly  make  some  certain  provision  for 
them;  but  finding  that  his  income  will  let  him  lay  up 
about  £46  a  year,  and  that  upon  no  better  security  than 
his  own  uncertain  life,  therefore  chooses  to  sell  the  sur- 
plusage of  his  income  —  what  is  it  worth?  " 

In  1730  there  was  published:  The  Gentleman's  Steward. 
and  Tenants  of  Manors  Instructed,  &c.  The  Tables  for 
Valuing  Estates  on  Lives  being  founded  on  Dr.  Halley's 
Hypothesis,  and  calculated  by  the  method  laid  down  by  Mr. 
Abr.  De  Moivre  to  4,  5,  6,  7  and  8  per-cent.,  &c.,  by  John 
Richards.  This  author,  although  no  mathematician,  had 
the  acuteness  to  perceive  that  the  true  method  of  valuing 
leases  for  lives  was  really  dependent  upon  specific  cal- 
culation, and  that  the  imaginary  estimates  currently 
adopted  frequently  proved  entirely  fallacious.  He  accord- 
ingly gave,  in  popular  form,  a  series  of  tables,  calculated 
upon  the  principles  laid  down  by  Halley  and  De  Moivre, 
and  which  were  of  great  practical  utility.  » 

Mr.  Lawrence,  Mr.  Gael  Morris,  and  Mr.  Weyman  Lee, 
all  published  works  upon  leases  and  annuities  about  the 
same  period;  and  each  (except  the  latter,  who  fell  into  a 
misapprehension  of  an  untenable  character)  conferred 
benefit  in  promulgating  correct  views  upon  these  ques- 
tions. ' — \ 

In  1740  Mr.  Thomas  Simpson  published  The  Nature  and  \ 
Laws  of  Chance,  &c.,  &c.,  a  work  which  was,  to  a  very  con- 
siderable extent,  an  abridgment  of  De  Moivre's;  and  which, 
being  published  at  a  much  smaller  cost,  obtained  a  con- 


76  YALE  READINGS  IN  INSURANCE 

siderable  circulation.  And  being  thus  known,  he  pub- 
lished in  1742,  The  Doctrine  of  Annuities  and  Reversions 
deduced  from  general  and  evident  principles,  with  useful 
Tables,  shewing  the  values  of  Single  and  Joint  Lives,  &c. 
,  He  seems  to  have  foreseen  that  the  doctrine  of  life  contin- 

\  gencies  was  destined  to  be  extensively  employed  at  a  future 
time,  and  that  consequently  more  real  utility  would  result 
from  endeavoring  to  discover  general  demonstrations 
applicable  to  all  tables  of  observations  that  might  be 
produced  from  time  to  time,  than  from  inventing  par- 
ticular hypotheses,  which,  however  interpretative  of  con- 
temporary data,  might  cease  to  be  useful  if  new  data 
should  arise.  He  expressed  a  view  which,  no  doubt,  had 
been  generally  felt  and  acted  upon,  namely,  that  Breslau, 
"a  place  where  the  generality  of  the  people  live  to  a  greater 
age  than  at  London  (as  appears  by  comparing  the  bills 
of  mortality  here  with  those  observations)  can  be  no  just 
measure  of  the  probability  of  life  in  this  place"  (London). 
He  accordingly  prepared  a  mortality  table  for  London, 
showing  what  he  believed  to  be  the  true  rate  of  mortality 
for  this  city,  which  differed  from  that  produced  by  Smart 
in  1726. 

Other  works  followed  of  a  similar  character,  such  as 

"^  Hodgson's  Calculation  of  Annuities  on  Lives  deduced  from 
the  London  Bills  of  Mortality,  &c.,  and  Corbyn  Morris's 
Essay  towards  Illustrating  the  Science  of  Assurance  (1747), 
and  Short's  New  Observations,  &c.  (1750),  and  other  edi- 
tions of  the  works  already  noted;  but  the  main  result 
desired  had  been  accomplished.  Mortality  tables  had 

/  been  constructed  on  English  data,  and  the  essential  prin- 
ciples of  life  measurement  were  now  generally  understood 
in  England. 


CHAPTER  VI 

HISTORY   OF  LIFE   INSURANCE   IN  THE   UNITED  STATES  1 


THE  p.nlrmi.gffi  who  settled  America  were  doubtless  some- 
what familiar  with  the  practice  of  insurance  as  it  was  then 
carried  on  in  Europe,  Bui  at  the  time  when  America 
was  first  settled,  of  the  different  kinds  of  insurance,  Q¥ep 
in  Europe,  marine-  in-euraoee  was  the  only.  kind  which  had 
been  carried  on  to  such  an  extent  as  to  be  really  called  a 
business,  and  even  with  this  it  was  a  full  century  after  the 
landing  of  the  Pilgrims  that  the  first  corporation^  were 
chartered  in  England  whose  purpose  was  to  insure  against 
the  perils  of  the  .sea.  Fire  insurance  as  a  business  was 
just  taking  form  in  Europe  at  the  beginning  of  the  seven- 
teenth century,  and  life  insurance  did  not  develop  on  a 
sound  basis  until  the  American  colonies  had  been  settled 
for  a  century  and  a  half. 

If  such  were  the  situation  in  Europe  in  regard  to  insur- 
ance, we  should  expect  to  find  during  most  of  the-colonkkl-- 
period  of  American  history  insurance  playing  but  a  small 
part.  As  shipping  increased,  marine  insurance  developed 
somewhat,  m^lv  carried  on  by  a  method  of  inter-insur- 
ance between  merchants,  and  aJl  of  it  by  means  of  indi- 
vidual underwriters,  that  is,  instead  of  a  policy  being 
written  by  a  corporation,  it  would  be  written  by  one  or 
more  individuals.  This  was  commonly  clone  in  England 
even  upon  exports  from  this  country,  but  that  there  was 
some  underwriting  of  marine  risks  in  America  is  evidenced 
by  the  fact  that  a  public  insurance  office,  which  in  the 

'By  Lester  W.  Zartman,  Assistant  Professor  of  Political  Economy 
in  Yale  University. 

77 


78  YALE  READINGS  IN  INSURANCE 

language  of  the  time  meant  an  office  where  insurance  might 
be  effected  through  the  medium  of  a  broker  whose  function 
was  to  obtain  individual  underwriters,  was  opened-  in 
Philadelphia  in  1721.  Though  most  of  the  underwriting 
continued  to  be  done  in  Europe,  yet  all  during  thejeigh- 
teeRth  century  these  public  insurance  offices  could  be  fouod 
in  the  larger  coast  cities. 

There  was  some  life  insurance  business  done  in  the  first 
century  and  a  half  of  our  colonial  existence,  but  it  was  of 
the  nature  of -marine  insurance  rather  than 'of  an  inde- 
pendent growth.  AH-  such  policies  on  lives  as  were  in 
existence  were  written  by  the  public  insurance  office^" 
which  existed  primarily  to  write  marine  policies.  People 
had  not  yet  realized  that  life  insurance  could  be  developed 
as  a  regular  business^  covering  all  <  the  contingencies  to 
which  life  is  subject.  Therefore  so  far  as  any  trace  can 
be  found  of  life  insurance  during  the  colonial  period  of  our 
history,  it  is  found  in  connection  with  what  were  then  con- 
sidered extraordinary  risks.*  If  a  mergjiant  contemplated 
a  v^jjage  to  Europe,  or  to  the  West  Indies,  or  a  journey 
to  the  frontier  regions  of  the  West,  he  was  likely  to  secure 
a  policy  of  life  insurance.  There  were  np  cqmpanfcB  from 
which  a  policy  could  be  secured  and  the  common  method 
was  to  have  a  number  of  men  in  the  community  agree  to 
share  the  risk.  The  policies  were  written  usually  for  not 
longer  than  on&..yoar«  Since  the  risk  of  death -from  a  sea. 
voyage  corresponded  closely  to  the  hazards  of  the  ship  in 
which  the  merchant  sailed,  the  rate  charged  corresponded 
to  the  rate  then  usually  charged  for  marine  insurance,  5 
per  cent,  of  the  amount  insured. 

As  an  example  of  one  of  these  policies,  we  have  recorded 
the  following  written  upon  the  jj^of  one  Benjamin  Lin- 
coln, of  Boston:  "Insurance  is  hereby  made  by  Benjamin 
Lincoln,  Esq.,  on  his  Natural  life,  aged  about  fifty-six 
years,  for  and  during  the  space  of  twelve  Kalender  months, 
to  Commence  from  the  date  hereof.  .  .  .  and  we  the  As- 
surers do  agree  that  the  liffi  of  the  said  Benjamin  Lincoln 


LIFE  INSURANCE  IN  THE  UNITED  STATES      79 

shall  be  rated  at  the  sum  of  one  Thousand  pounds  lawfull 
money.  .  .  .  For  which  we  have  received  the  premium 
due  us  of  five  pounds  per  cent.  .  .  .  In  case  he  shall  dur- 
ing the  said  Term  happen  to  die,  then  we  will  well  and 
Truly  pay  unto  his  heirs,  the  Sums  we  have  hereunto 
Subscribed." 

The  first  definite  step  in  America  toward  the  establish- 
ment of  insurance  as  a  business  was  the  organization  of  a 
fire  insurance  company  in  Philadelphia  in  1752.  In  1748 
a  fire  had  occurred  in  London  destroying  some  200  houses. 
This  fire  seems  to  have  directed  the  attention  of  one  of  the 
Philadelphia  marine  underwriters  towards  London  fire 
insurance.  Just  who  worked  out  the  plan  of  organiza- 
tion of  the  new  company  is  not  known.  Before  any  public 
mention  of  the  company  had  been  made,  the  project  had 
received  the  approval  of  the  Lieutenant-Governor  of  the 
Colony,  and  that  most  distinguished  citizen  of  Philadelphia, 
Benjamin  Franklin.  The  first  manifest  incident  was  the 
appearance  of  an  advertisement  in  the  Philadelphia  Gazette 
of  February  18, 1752,  asking  all  persons  inclined  to  subscribe 
to  the  articles  of  insurance  on  houses  from  fire  to  appear 
at  the  Court  House. 

A  charter  was  obtained  from  the  Pennsylvania  govern- 
ment. The  new  company  was  called  the  "Philadelphia 
Contributionship  for  the  Insurance  of  Houses  from  Loss 
by  Fire."  This  first  American  insurance  company  was 
organized  on  the  mutual  basis.  Organized  by  public- 
spirited  men  to  protect  the  citizens  of  Philadelphia,  it 
never  changed  its  original  purposes  and  still  survives, 
thanks  to  the  fact  that  Philadelphia  has  never  suffered 
from  a  disastrous  conflagration,  the  oldest  fire  insurance 
company  in  America. 

It  was  seven  years  after  the  first  fire  insurance  company 
came  into  existence  in  America  that  the  first  life  insurance 
company  had  its  origin.  In  1759  the  Presbyterian  synods 
of  New  York  and  Philadelphia  procured  a  charter  from 
the  proprietary  government  of  Pennsylvania  for  a  corpo- 


80  YALE  READINGS  IN  INSURANCE 

ration  whose  purposes  were  fully  expressed  in  its  title, 
"A  Corporation  for  the  Relief  of  Poor  and  Distressed 
Presbyterian  Mjnjgj££g_and  of  the  Poor  and  Distressed 
Widows  and  Children  of  Presbyterian  Ministers."  This 
institution,  which  has  become  a  life  insurance  company, 
the  oldest  now  existing,  was  a  grpyth,  not  a  creation  of 
one  year.  rA  £uad  had  previously  existed  in  aid  of  the 
poorly  supported  cjgtgp,  and  the  ministers  had  expressed 
a  wish  that,  by  some  fund,  like  payment  could  be  granted 
to  their  surviving  wives  and  children.  Donations  had  been 
received  from  Great  Britain  as  well  as  from  America  for 
this  purpose.  The  intention  in  organizing  the  corporation 
was  to  provide  for  sy&tpjTja^ig  relief  of  unfortunate  clergy- 
men by  more  systematic  contributions.  It  was  not 
expected  that  the  clergy  would  contribute  the  full  amount 
of  funds  necessary  to  provide  for  the  benefits  promised, 
but  that  outside  contributors  would  still  aid.  Under 
such  circumstances  it  was  not  likely  that  much,  if  any, 
•  'attention  was  given  to  the  principles  of  scientific  life  hv 
suranjjp.  That  attention  could  not  have  been  given  to 
'these  principles  seems  evident,  since  it  was  not  until  three 
years  later  that  the  first  life  insurance  company  in  England 
was  organized  along  sound  lines.  Although  the  organizers 
of  this  Presbyterian  corporation  knew  little  of  the  science 
of  life  insurance,  the  company  survived  its  early  mis- 
takes, changed  its  plans  when  the  principles  of  life  insur- 
ance did  become  known,  and  still  prospers  in  a  humble 
way. 

Since  so  much  of  historic  importance  centers  around 
this  old  company,  it  is  interesting  to  note  some  of  the  pro- 
visions of  its  first  plan  of  agreement.  It  was  provided  that: 

"1.  The  yearly  amount  of  the  conlribulions  shall  be 
two  pounds,  three  pounds,  four  pounds,  five  pounds,  six 
pounds,  or  seven  pounds,  current  money  of  Pennsylvania; 
and  that  the  respective  amounts  to  be  paid  to  the  widows 
and  children  of  the  contributors,  be  ten  pounds,  fifteen 
pounds,  twenty  pounds,  etc.,  respectively:  and  that  no 


LIFE  INSURANCE  IN  THE  UNITED  STATES       81 

alteration  be  ever  made  in  the  rates  but  that  every  con- 
tributor abide  by  the  rate  he  first  chooses. 

"3.  That  no  annuity  be  transferable  or  liable  to  be  sold; 
inasmuch  as  that  practice  would  frustrate  the  very  end 
of  the  charter,  and  of  the  pious  contributions  for  this 
purpose. 

"5.  That  every  contributor  at  his  marriage  and  as 
often  as  that  happens  shall  pay  one  year's  rate  extraor- 
dinary as  he  thereby  makes  the  chance  worse,  by  bring- 
ing, in  general,  a  younger  widow  upon  the  fund. 

"8.  That  the  contributor's  widow,  if  there  be  no  chil- 
dren, shall  be  entitled  to  her  whole  annuity  during  her 
widowhood,  but  to  no  more  than  half  the  annuity  after 
her  marriage,  during  her  natural  life. 

"9.  That  if  there  be  a  child,  or  children,  and  no  widow, 
it,  or  they,  shall  be  entitled  to  the  whole  annuity  for  thir- 
teen years  after  the  father's  decease  and  no  longer." 

.Xen  years- later,  the  clergymen  in  the  Communion  of  the 
Church  of  England  in  America,  of  New  York,  New  Jersey, 
and  Pennsylvania,  organized  companies-  in  each  colony, 
similar  to  the  one  already  existing  among  the  Presbyterian 
ministers.  There  were  to  be  contributions  by  the  minis- 
ters and  the  churches,  as  well  as  by  charitably  disposed 
persons.  During  the  American  Revolution  the  preserva- 
tion of  the  funds  held  by  the  Episcopal  corporation,  as 
well  as  those  held  by  the  Presbyterians,  was  an  object  of 
solicitude.  This  anxiety  was  justified  by  the  outcome, 
for  the  New  Jersey  fund  was  lost  —  the  New  Jersey  treas- 
urer, a  royalist,  left  the  country,  taking  the  funds  with 
him.  After  the  war  the  Episcopal  companies  fell  largely 
into  inactivity.  In  1797  the  State  of  Pennsylvania  passed 
an  act  authorizing  a  complete  separation  of  the  Penn- 
sylvania members  from  the  New  York  and  New  Jersey 
companies,  and  the  reorganized  Pennsylvania  company 


82  YALE  READINGS  IN  INSURANCE 

entered  upon  a  long  career,  confining  its  activities  to  insur- 
ing only  ojiinigters  of  the  Episcopal  denomination  in  the 
State  of  Pennsylvania. 

These  two  denominational  corporations,  half  insurance, 
half  charitable  institutions,  form  the  transition  stage  in 
American  life  insurance  from  insurance  by  individual 
underwriters  to  insurance  by  corporations  on  a 
basis^solejy.  A  beginning  in  life  insurance  had  been 
made,  but  progress  was  slow  for  almost  another  century. 
Apart  from  annuity  contracts,  it  is  probable  that  there 
were  not  a  hundred  policies  in  force  in  the  United  States 
on  the  risk  of  life  at  the  beginning  of  the  nineteenth  cen- 
tury. 

The  Insurance  Company  of  North  America  was  chartered 
by  Pennsylvania  in  1794  to  do  a  general  insurance  business, 
including  the  insuring  of  lives.  But  by  1799  it  had  not 
written  over  half  a  dozen  policies  of  life  insurance  and 
in  less  than  a  decade  had  given  up  this  branch  of  the  busi- 
ness entirely. 

''That  life  insurance  did  not  prosper,  in  the  United  States 
during  the  eighteenth  century,  and  for  some  time  during 
the  succeeding  century,  is  not  strange.  Life  insurance  can- 
not be  successfully  prosecuted  in  any  country  which  is 
subject  to  serious  fluctuations  in  the  death—rate.  In 
Europe  life  insurance  developed  slowly  because  of  the  ter- 
rible plagues  which  swept  over  the  country.  It  developed 
slowly  in  the  United  States  for  much  the  same  reason. 
The  cities  in  the  United  States  during  their  early  history 
suffered  seriously  from  epidemics.  Philadelphia  and  N«w 
York  had  many  visitations  of  different  diseases.  Small- 
pox was  a  recurring  epidemic.  In  1741  an  unknown 
disease  carried  off  5  per  cent,  of  the  population  of  Phila- 
delphia, in  1746  diphtheria  caused  wide-spread  terror,  in 
1756  small-pox  was  prevalent  again,  and  in  1776  small- 
pox took  8  per  cent,  of  the  population  of  that  city. 
So  late  as  1805  -the  deaths  from  yellow  fever  added  50 
per  cent,  to  the  normal  death  rate  in  Philadelphia.  Much 


LIFE  INSURANCE  IN  THE  UNITED  STATES        83 

as  is  now  known  about  life  insurance,  it  is  doubtful  if 
life  insurance  could  flourish  under  such  conditions.  In 
fact  there  are  considerable  areas  in  the  United  States  to- 
day in  which  the  best  companies  refuse  to  write  any  policies. 

Soon  after  1800,  however,  there  began  to  be  some  active 
^  interest  shown  in  life  insurance  covering  the  whole  of  life. 
Level  premium  life  insurance  had  now  been  in  operation  in 
England  for  more  than  a  generation.  Some  correspond- 
ence had  taken  place  between  people  in  the  States  and 
the  English  life  insurance  companies.  Early  in  1807  the 
Pelican  Life  Insurance  Company  of  London  established  an 
office  in  Philadelphia.  In  various  sections  of  the  country 
the  idea  of  insurance  was  penetrating  from  England. 
Already  an  association  called  the  "Pennsylvania  Company 
for  the  Insurance  on  Lives"  was  projected,  and  while  the 
project  matured  slowly,  it  was  in  readiness  for  formal 
organization  late  in  1^9.  The  organization  of  this  com- 
pany marks  the  beginning  of  life  insurance  in  the  United 
States  upon  a  business  basis.  This  company  was  eapital- 
iaed  at  $500,000.  The  policy  forms  were  copied  from 
those  in  use  in  England  and  the  rates  charged  were  those 
charged  by  the  London  companies,  raised  in  some  localities 
to  offset  what  was  considered  a  heavier  mortality  rate. 

In  1818  the  Massachusetts  legislature  chartered  the 
Massachusetts  Hospital  Life  Insurance  Company.  This 
was  a  stock  company  capitalized  at  $500,000  and  em- 
powered to  do  a  life  insurance  and  trust  business.  One 
feature  of  the  charter  provisions  should  be  carefully  noted. 
The  corporation  was  required  to  pay  the  Massachusetts 
Hospital  one-third  of  the  net  profits  on  its  life  business 
after  deducting  legal  interest  on  its  paid-up  capital,  and 
the  same  requirement  was  to  be  imposed  upon  any  other 
life  company  that  should  be  chartered.  The  reason  back 
of  the  provision  was  evidently  the  belief,  a  belief  all  too 
prevalent  yet,  that  life  insurance  is  an  especially  profitable 
business,  and  that  for  the  privilege  of  doing  business  the 
company  ought  to  pay  liberally  to  the  state.  The  result 


84  YALE  READINGS  IN  INSURANCE 

of  this  charter  provision  was  twofold  —  the  company  did 
very  little  life  insurance  business,  and  no  other  life  insur- 
ance companies  were  organized  in  Massachusetts  for 
twenty  years. 

The  next  company  organized  to  do  a  life  insurance  busi- 
ness was  the  New  York  Life  Insurance  and  Trust  Company. 
Chartered  in  1830,  it  issued  during  the  first  nine  years  of 
its  existence  nearly  two  thousand  policies.  It,  too,  was 
a  stock  company  with  a  capital  of  a  million  dollars. 

Several  characteristics  are  common  to  all  t  three  of  these 
first  corporations  organized  in  America  to  furnish  life 
insurance.  All  were  stock  companies  with  large  capitaliza- 
tion; all  were  chartered  to  do  two  kinds  of  business/life 
insurance  and.  trust  business;  all  have  given  up  the  issue 
of  life  insurance  policies  and  all  survive  as  prominent 
trust  and  banking  companies  in  the  cities  where  they  were 
first  chartered. 

vx/With  the  chartering  of  the  New  England  Mutual  Life 
Insurance  Company  by  Massachusetts  in  1835,  and  the 
Girard  Life  and  Trust  Company  by  Pennsylvania  in  the  fol- 
lowing year,  a  new  era  in  life  insurance  history  in  the 
United  States  began.  So  far,  outside  of  the  half  charitable 
plans  of  the  Presbyterian  and  Episcopal  corporations 
already  noticed,  all  life  insurance  was  being  conducted  on 
the  ^qgjmj^n.  News  of  the  great  success  of  the  Equitable 
of  England  began  to  be  known  in  America.  Even  the  siock 
companies  were  advertising  this  success  as  a  means  of  in- 
ducing people  to  take  out  Reinsurance.  Thus  in  1830, 
in  the  so-called  "proposals"  wmcji  the  Massachusetts 
Hospital  Life  sent  out,  it  is  stated:  "Life  insurance  has 
increased  very  much  in  England  during  the  last  forty  or 
fifty  years.  .  .  .  The  Equitable  Society  in  London,  in  the 
course  of  twenty  years  from  the  year  IjjjQP,  made  insur- 
ance on  151,754  lives,  being  more  than  7500  policies  exe- 
cuted annually  by  that  single  office." 

The  Equitable  was  a  mutual  company,  that  is,  a  corpo- 
ration without  capital  stock.  Every  policy-holder  was  a 


LIFE  INSURANCE  IN  THE  UNITED  STATES       85 

member  and  shared  in  the  profits  which  were  made.  With 
the  constant  attention  which  was  now  being  directed  to  the 
Eqwi&bble,  it  would  have  been  strange  if  a  company  had 
not  been  organized  in  America  on  a  similar  plan.  The 
New  England  Mutual  Life  Insurance  Company  of  Boston 
was  chartered  by  Massachusetts  in  1835  to  emulate  ttye 
Equitable  of  London.  But  the  Massachusetts  legislature 
was  afraid  of  a  mutual  company  without  capital,  and  so 
provided  that  the  organizers  of  this  company  should  fur- 
nish $100,000  of  guarantee  capital  which  later  was  to  be 
refunded.  This  made  it  difficult  to  complete  the  organiza- 
tion of  the  company,  and  it  was  not  until  1843  that  the 
company  commenced  to  write  insurance.  In  the  mean- 
time, it  happened  that  a  stock  company  took  the  first"  real 
step  towards  the  adoption  of  the  mutual  principle.  The 
Girard  Life  and  Trust  Company  of  Philadelphia,  organized 
in  1836,  while  holding  to  joint  stock  management,  made 
provision  whereby  the  profits  of  the  business  might  be 
shared  with  the  policy-holders.  In  1844,.  in  accordance  with 
its  promise,  it  declared  its  first  dividend.  The  plan  proved 
so  popular  and  the  Girard  prospered  so  much  that  its 
competitor,  the  Pennsylvania  Company,  announced  that 
thereafter  all  premiums  for  one  or  more  years  of  insurance 
would  entitle  the  policy-holder  to  a  credit  of  one-half  the 
profits. 

Once  started,  the  mutual  plan  of  life  insurance  spread 
rapidly.  The  time  was  opportune.  The  conflagration  of 
1835  in  New  York  had  ruined  many  of  the  stock  fire  in- 
surance companies,  and  a  large  number  of  mutual  com- 
panies had  been  organized  to  furnish  fire  insurance.  Until 
the  next  conflagration  in  1845  they  had  a  very  successful 
existence.  In  marine  insurance,  the  mutual  plan  was 
proving  equally  successful.  If  the  mutual  plan  was  suc- 
cessful in  furnishing  fire  and  marine  insurance,  why  should 
it  not  also  be  successful  in  the  field  of  life  insurance? 
Furthermore  there  was  the  known  success  of  the  mutual 
companies  in  England.  The  American  stock  companies 


86  YALE  READINGS  IN  INSURANCE 

had  recognized  this  success  and  were  granting  one-half 
the  profits  to.  the  policy-holders.  If  a  mutual  company 
were  organized,  the  policy-holders  could  get  all  the  profits. 
The  time  was  ripe-  for  the  spread  of  the  mutual  system. 

In  1842  the  Mutual  Life  of  New  York  was  organized. 
In  1843  the  New  England  Mutual  completed  its  organiza- 
tion. In.  1845  the  Mutual  Benefit  of  New  Jersey  was 
chartered.  In  the  same  year  the  New  York  Life  Insur- 
ance Company  succeeded  in  fulfilling  the  requirements 
which  the  legislature  had  laid  down  as  prerequisite  for 
organization. 

With  the  formation  of  these  companies  begins  the  great 
development  of  life  insurance  hi  the  United  States,  a  de- 
velopment which  has  resulted  in  a  larger  per  capita  amount 
of  insurance  in  force  in  the  United  States  than  is  found  in 
any  other  country  in  the  world.  Interesting  it  is  to  trace 
the  spread  of  insurance  at  that  time  over  the  country. 
With  the  formation  of  more  companies,  qompetition  for 
business  began.  The  three  early  stock  companies  had 
been  content  with  such  business  as  had  come  unsolicited 
to  the  office.  Under  competitive  conditions,  the  com- 
panies began  to  appoint  men  in  different  cities  to  solicit 
life  insurance  as  a  side  issue  to  their  other  work.  Minis- 
ters, teachers,  and  lawyers  were  appointed  agents  and 
given  a  small  commission.  With  agents  soliciting  business, 
more  people  began  to  be  interested  in  life  insurance.  As 
they  became  interested  they  wondered  why  a  local  com- 
pany could  not  be  organized.  Thus  it  was  that  life  in- 
surance was  spread  over  the  country.  Take,  for  instance, 
the  manner  in  which  life  insurance  started  in  Connecticut. 
The  Mutual  Benefit  appointed  an  agent  in  Hartford  in 
1846.  An  active  campaign  for  policy-holders  was  inaugu- 
rated. The  idea  of  life  insurance  was  so  new  that  wide 
attention  was  given  to  it  in  a  way  little  understood  at 
>resent.  Public  meetings  were  held  to  discuss  the  ques- 
;ion.  All  at  once  the  novelty  of  life  insurance  became 
;he  talk  of  the  town.  The  Mutual  Benefit  agent  did  a 


LIFE  INSURANCE  IN  THE  UNITED  STATES      87 

large  business.  The  thought  struck  some  Hartford  busi- 
ness men  that  they  could  as  well  organize  a  home  com- 
pany. In  February,  1846,  the  agent  had  been  appointed 
for  the  Mutual  Benefit;  three  months  later  the  Connecticut 
legislature  chartered  the  Connecticut  Mutual  Life  Insur- 
ance Company. 

The  stock  companies  had  opposed  the  chartering  of 
mutual  companies  on  the  ground  that  the  mutual  system 
was  insecure,  and  that  already  sufficient  facilities  were 
available  for  furnishing  life  insurance.  Once  the  mutual 
companies  were  organized,  they  soon  drove  the  stock 
companies  out  of  the  life  insurance  field.  In  1847  one 
more  mutual  company  was  organized.  In  1848  three 
more,  in  1849  two,  in  1850  four  mutual  life  insurance 
companies  came  into  being.  In  1851  three  more  mutuals 
were  organized,  in  1852  two  mutuals,  in  1853  three  mu- 
tuals, in  1854  two  mutuals,  and  so  on  until,  by  1860,  thirty- 
four  companies  had  been  organized  to  do  a  life  insurance 
business  on  either  the  strictly  mutual  plan  or  on  a  plan 
whereby  all  but  a  limited  amount  of  profits  were  to  go  to 
the  policy-holders. 

In  1843  the  ten  life  companies  then  in  existence  did  not 
have  over  six  and  one-half  million  dollars  of  insurance  in 
force.  By  the  end  of  1860  this  amount  had  increased  to 
one  hundred  and  sixty  million  dollars. 

Rapid  as  was  this  growth  in  the  insurance  business 
from  the  successful  organization  of  mutual  companies  in 
1843  to  1860,  it  was  but  the  beginning  of  one  of  the  most 
interesting  periods  in  any  life  insurance  history.  With 
the  outbreak  of  the  Civil  War  there  were  grave  doubts 
among  the  managers  of  the  companies  as  to  its  effect  upon 
their  business.  A  large  territory  was  cut  off  from  com- 
munication and  thousands  of  men  were  going  into  a  hazard- 
ous occupation.  The  result  was  not  what  was  expected. 
Life  insurance  business  prospered  as  it  had  never  prospered 
before.  During  1862,  as  well  as  during  each  of  the  two 
succeeding  years,  three  new  life  insurance  companies  were 


YALE  READINGS  IN   INSURANCE 


organized.  In  the  closing  year  of  the  war  nine  new  com- 
panies were  organized,  and  in  the  following  year  thirteen 
more  were  brought  into  the  field,  thus  almost  doubling  in 
two  years  the  number  of  life  insurance  corporations.  Still 
greater  growth  came.  In  1867  nineteen  more  companies 
were  organized,  in  1868  nineteen  again,  and  hi  1869,  which 
saw  the  end  of  the  movement,  eleven  more. 

Thirty  years  earlier  life  insurance  had  been  represented 
by  a  few  stock  companies,  writing  a  small  amount  of  in- 
surance each  year.  At  the  close  of  -1§6§_  there  were  one 
hundred  and  ten  life  insurance  corporations  in  the  United 
States  actively  competing  for  business.  The  amount  of 
insurance  in  force  had  increased  to  nearly  a  billion  and  a 
half  dollars.  ^  f  <v*) 

The  tremendous  development  which  took  place  so  sud- 
denly in  American  life  insurance  has  never  been  satis- 
factorily explained.  Men  who  witnessed  it  were  puzzled 
at  the  rapidity  with  which  the  growth  took  place.  Un- 
doubtedly there  were  a  number  of  contributing  causes. 
Chief  among  these  causes  was  the  newness  of  the  idea, 
and  the  almost  universal  ignorance  even  among  those  who 
were  in  control  of  the  companies  as  to  the  basic  principles 
of  the  business.  Ealse_  assumptions  were  made  in  con- 
ducting the  business  and  deceitful  results  followed.  In  the 
first  place,  actuarial  science  had  so  little  developed  in 
America  that  few  people  knew  that  when  a  company 
insures  a  number  of  people  for  life,  charging  the  same 
'  premium  for  each  year  of  life,  that  the  company  must 
save  something  out  of  the  first  year's  premiums  in  order 
to  pay  the  heavier  losses  that  are  sure  to  come  as  the 
group  becomes  older.  It  was  generally  understood  by 
this  time  that  the  risk  of  death  increased  somewhat  with 
increased  age,  but  how  much  it  increased,  and  what  pro- 
vision should  be  made  for  the  greater  hazard,  was  not 
known  except  by  a  very  few. 

The  early  American  companies  were  simple  imitations 
of  the  London  Equitable.  That  company  had  prospered 


LIFE  INSURANCE  IN  THE  UNITED  STATES       89 

for  nearly  a  century,  therefore  its  plans  must  be  sound. 
Its  plans  were  good,  and  if  the  American  companies  had 
followed  the  Equitable  in.all  things,  many  of  their  mistakes 
would  not  have  been  made,  and  part  of  the  speculative, 
feverish  growth  in  life  insurance  might  have  been  pre- 
vented. But  the  imitation  of  the  London  Equitable  was 
only  partial.  The  Equitable  was  charging  excessively  high 
rates  for  insurance.  American  managers  understood  that 
the  rate  of  interest  entered  into  the  computation  of  the 
premium;  the  higher  the  rate  of  interest  that  could  be  real- 
ized, the  lower  the  premium  might  be.  As  the  interest 
rate  was  much  higher  in  the  United  States  than  in  Eng- 
land, so  premiums  for  insurance  might  be  less.  Thus  while 
the  London  Equitable  was  charging  $40  per  $1000  of 
insurance  at  age  30,  the  highest  premium  charged  by  any 
American  mutual  office  was  $23.60. 

These  rates  charged  by  the  American  companies  were 
adequate  if  other  mistakes  had  not  been  made.  But  with 
rates  scarcely  half  those  of  the  London  Equitable,  the 
American  companies  set  forth  th£._gLeat_divideads  which 
had  accrued  to  policy-holders  in  the  London  company  as 
illustrative  of  what  might  be  expected  from  American  com- 
panies. Furthermore  eyen  greater  dividends  were  paid. 
At  the  end  of  the  first  few  years'  transactions  the  man- 
agers of  the  companies  found  that  they  had  considerable 
amounts  of  money  on  hand,  and  not  knowing  that  most  of 
these  sums  should  be  kept  as  a  reserve  to  make  up  for 
future  losses,  they  were  given  back  to  the  policy-holders 
as  dividends.  Thus  some  companies  were  able  even  with 
low  premiums  to  declare  80  per  cent,  dividends  on  the  pre- 
mium paid. 

Even  later  in  the  period,  when  knowledge  of  life  insur- 
ance began  to  be  known  more  widely,  a. deceitful  way  of 
declaring  dividends  was  adopted  by  some  companies.  In- 
stead of  paying  back  cash  to  the  policy-holders,  scrip 
dividends  in  the  shape  of  non-interest-bearing  notes  were 
given  by  the  companies,  payable  at  some  future  date, 
sometimes  at  death.  In  this  way  large  dividends  could  be 


90  YALE  READINGS  IN  INSURANCE 

and  were  declared.  All  this  had  its  effect  upon  the  growth 
of  the  business.  The  desire  for  family  protection  is  strong 
among  all  Anglo-Saxons;  it  has  proved  to  be  particularly 
strong  in  this  country,  and  if  insurance  can  be  obtained 
cheaply  it  is  desired  by  nearly  every  one.  With  the  com- 
panies ignorantly  transacting  business  on  false  assump- 
tions, the  masses  of  people  were  led  to  believe  that  a  new 
device  had  been  discovered  whereby  men  could  obtain 
protection  for  almost  nothing.  In  fact  the  impression 
spread  that  life  insurance  was  a  good  investment,  and  it 
was  little  wonder  that  the  business  prospered. 

Delusive  dividends  and  faulty  reserve  plans  were  the 
first  causes  of  the  rapid  growth  of  the  business.  Another 
cause  of  popularity  was  the  method  adopted  by  many 
companies  of  receiving  premiums.  With  the  advent  of  the 
mutual  companies,  a  number  of  them  adopted  the  plan  of 
accepting  interest-bearing  notes  instead  of  cash  for  the 
premium.  In  many  cases,  from  half  to  four-fifths  of  the  pre- 
mium would  be  accepted  in  the  shape  of  a  note.  The 
agents  promised  that  the  dividends  made  by  the  companies 
would  be  so  high  as  to  repay  the  notes,  and  hence  insurance 
could  not  only  be  secured  cheaply,  but  with  scarcely  any 
outlay  of  cash. 

So  it  was  that  with  the  novelty  of  the  business,  with  a 
delusive  way  of  declaring  dividends,  and  with  the  adop- 
tion of  the  system  of  paying  premiums  with  notes,  life 
insurance  in  the  United  States  from  1850  to  1870  had  a 
development  unparalleled  for  its  rapidity  and  extent. 

A  change  soon  took  place.    The  prosperity  of  the  life 


insurance  business  had  brought  men  to  it  who  ought  not 
to  have  been  attracted.  Even  if  the  country  as  a  whole 
had  not  soon  suffered  one  of  the  most  severe  financial  and 
industrial  depressions  it  has  ever  experienced,  there  would 
probably  have  been  trouble  in  the  life  insurance  business. 
The  growth  in  the  number  of  companies  had  been  too 
rapid.  Many  of  the  companies  had  been  organized  for 
the  sole  purpose  of  furnishing  Lucrative  positions  to  the 


LIFE  INSURANCE  IN  THE  UNITED  STATES       91 

men  who  organized  them.  Even  in  the  many  cases  where 
Joonest-management  was  desired,  the  business  as  we  have 
seen  was  conducted  unwisely.  In  some  instances,  honesty 
was  never  intended,  and  such  companies  quickly  brought 
trouble. 

In  1868,  even  while  new  companies  were  still  being 
organized,  three  companies  went  into  the  hands  of  receivers, 
one  insured  in  another  company  which  subsequently  failed, 
and  one  was  closed  at  the  suit  of  stockholders.  In  1870 
seven  companies  went  out  of  existence.  In  1871  two 
went  into  the  hands  of  receivers,  and  the  disaster  was  but 
started.  In  1872  thirteen  companies  failed,  or  reinsured 
in  companies  which  failed.  Thus  before  the  financial 
depression  which  affected  all  lines  of  business  had  begun, 
thirty  life  insurance  companies  had  been  forced  to  discon- 
tinue. When  the  general  hard  times  did  set  in,  and  failures 
in  other  lines  of  business  became  frequent,  the  rate  of 
insurance  failures  was  accelerated.  In  1873  fourteen  com- 
panies were  closed  up,  in  1874  four,  in  1875  nine,  and 
in  1876  nine.  Six  companies  went  to  the  wall  in  1877> 
making  a  total  of  seventy-one  life  insurance  corporations 
which  had  been  forced  out  of  business  in  ten  years.  The 
weaker  companies  had  been  weeded  out  and  failures  be- 
came less  frequent.  Between  1878  and  1888  a  few  more 
companies  failed,  but  mostly  as  a  result  of  conditions  aris- 
ing in  the  previous  decade. 

Along  with  the  actual  failures  of  many  companies  had 
come  a  decline  in  the  business  of  all.  There  was  nearly 
two  billion  dollars  of  insurance  in  force  in  1870;  by  1880 
it  had  decreased  to  less  than  a  billion  and  a  half. 

The  causes  of  this  disastrous  period  in  life  insurance 
history  have  been  indicated.  The  delusive  methods  of  the 
companies  in  the  preceding  period  had  caused  an  unwise 
stimulus  to  the  business.  Companies  had  been  organized 
more  rapidly  than  capable  men  could  be  developed  to 
manage  them.  The  premium  note  system  had  resulted 
in  many  dissatisfied  policy-holders.  It  had  been  shown 


92  YALE  READINGS  IN  INSURANCE 

what  yet  has  not  been  learned  by  many,  that  life 
insurance  cannot  be  secured  at  a  small  cost.  This  had 
made  it  difficult  to  secure  new  business,  just  at  a  time 
when  there  was  much  competition  for  new  business. 
*.  Severe  competition  resulted  in  the  acceptance  of  inferior 
lives;  inferior  lives  resulted  in  heavy  death  losses;  to  re- 
coup these  losses  speculative  investments  were  made;  and 
then  came  the  financial  panic  at  the  crucial  time.  The 
cumulative  result  of  all  these  causes  was  wide-spread  dis- 
aster among  the  companies. 

By  1880  began  the  revival  in  business.  The  companies 
which  had  survived  had  been  subjected  to  a  hard  test. 
Gradually  they  recovered  their  ground  as  financial  con- 
ditions improved  and  as  memories  of  life  insurance  in 
the  seventies  became  less  vivid.  No  new  companies  were 
organized  for  twenty  years,  but  from  1880  to  1905  the 
business  done  by  the  old  companies  increased  apace.  In 
1885  the  total  insurance  in  force  passed  the  two  billion 
mark,  five  years  later  it  had  doubled,  by  1900  nine  bil- 
lion dollars  of  insurance  was  in  force,  and  by  1905  five 
million  level  premium  life  insurance  policies  were  in  force 
in  the  United  States,  insuring  for  a  total  amount  of  twelve 

illion  dollars. 

/Space  will  not  permit  more  than  a  passing  mention  of 
the  striking  characteristics  of  this  later  period  from  1880  to 
1905.  There  was  the  extensive  development  of  the  agency 
system,  the  increase  in  the  expense  ratio,  the  liberalizing 
of  the  policy  contract,  the  wide  use  of  the  deferred  divi- 
dend system,  and  the  invasion  by^SQme  of  the  New  York 
companies  of  foreign  countries.  All  tbe§e  have  had  a 
prominent  part  in  the  great  development  oil&fi^ business 
and  have  been  the  subject  of  much  discussion. 

During  the  summer  of  1905,  starting  with  a  personal 
quarrel  for  control  of  one  of  the  largest  companies,  revela- 
tions were  made  of  bad  management  which  led  New  York 
and  other  states  to  make  an  investigation  into  the  manage- 
ment of  a  number  of  companies.  Exposures  were  made  in 


LIFE  INSURANCE  IN  THE  UNITED  STATES       93 

some  cases  of  betrayal  of  trust  which  shocked  the  public. 
These  disclosures,  coming  at  a  time  when  the  public  mind 
was  already  inflamed  by  exposures  made  in  other  lines  of 
business,  resulted  in  a  demand  by  the  public  that  remedial 
legislation  should  be  enacted,  and  during  the  following  two  tl^^, 
winters-,  many  legislatures  busied  themselves  in  revising 
the  insurance  laws.  Nothing  has  been  said  in  this  sketch 
of  life  insurance  in  the  United  States  about  legal  regulation 
of  the  business,  but  it  has  played  a  conspicuous  part. 
From  1860  on,  nowhere  else  in  the  world  have  so  many 
laws,  attempting  to  regulate  the  business  to  such  a  great 
extent,  been  enacted  as  in  the  United  States.  But  what 
was  attempted  before  1905  has  been  surpassed  by  the  laws 
placed  upon  the  statute  books  since  that  year.  Laws 
have  been  passed  regulating  salaries^-expeiisesj-and-  -pre- 
miums. .  Standard  policies  have  been  provided.  The 
amount  of  insurance  that  could  be  written  has  been  pre- 
scribed. Surplus  is  limited  in  amount.  Methods  of  allot- 
ting dividends  have  been  defined.  Systems  of  control  by 
the  policy-holders  have  been  enacted  into  law.  More  pub? 
licity  is  demanded.  In  short  in  many  cases  the  climax  of 
state  regulation  has  been  reached.  Any  further  attempt 
at  control  would  practically  result  in  the  states  taking 
over  the  active  management  of  the  business. 

As  a  result  of  the  disclosures  and  of  the  restrictive  laws 
which  followed,  the  year  1905  marks  something  of  a  halt 
in  life  insurance  progress.  Whether  the  laws  will  ulti- 
mately have  good  results  remains  yet  to  be  seen. 
^/in  any  history  of  life  insurance  in  the  United  States, 
/  however  brief,  some  attention  should  be  given  to  assess- 
ment plans  of  life  insurance.  Level  premium  or  old  line 
Ufa,  .insurance,  the  history  of  which  has  been  traced,  in- 
volves the  idea  of  charging  a  policy-holder  a  relatively 
high  premium  during  the  earlier  ages,  and  accumulating 
a  reserve  in  order  that  the  premiums  may  not  go  higher 
at  the  later  ages  as  the  risk  of  death  increases.  Assess- 
ment insurance  has  followed  so  many  plans  that  it  is  diffi- 


94  YALE  READINGS  IN  INSURANCE 

cult  to  define,  but  in  general  it  involves  the  idea  of  assessing 
members  just  enough  to  pay  current  expenses,  and  current 
death  losses,  leaving  a  higher  death  rate  in  the  future  to 
be  provided  for  by  higher  or  more  frequent  assessments. 

Normally,  in  the  evolution  of  life  insurance,  assessment 
insurance  should  precede  level  premium  life  insurance.  It 
is  a  sort  of  half-way  development  from  the  primitive  plan 
of  taking  up  a  collection  for  the  family  left  in  need,  and 
modern  level  premium  life  insurance.  But  life  insurance 
did  not  develop  normally  in  this  country  as  it  did  in  Eng- 
land. With  no  system  of  life  insurance  in  this  country, 
the  fully  developed,  level  premium  system  was  imported 
from  England.  An  abnormal  beginning  in  the  United 
States  resulted  in  an  abnormal  development.  After  level 
premium  life  insurance  had  become  firmly  established,  there 
arose  the  assessment  associations.  What  brought  them  into 
existence,  or  where  their  originators  got  their  ideas,  is  not 
known.  Ass£SSment_§Qcieties  had  flourished  in  England  in 
the  early  part  of  the  eighteenth  century,  but  had  long 
passed  away.  It  is  probable  that  the  first  assessment 
societies  in  the  United  States  were  suggested  by  the  Eng- 
lish friendly  societies,  and  took  the  form  which  they  did 
in  the  United  States  because  of  the  life  insurance  con- 
dition in  America  at  the  time,  namely,  the  prevalence  of 
the  premium  note  system. '- 

The  first  assessment  society  was  organized  in  New  York 
in  1867.  In  1868  there  was  organized  the  famous  secret 
association,  the  "Ancient  Order  of  United  Workmen." 
These  two  early  associations  represent  the  two  types  which 
assessmentism  has  taken  in  this  country.  One  type  has 
been  the  associations  organized  for  the  sole  object  of  fur- 
nishing life  insurance  on  a  business  basis.  The  other  type 
has  been  the  fraternal  association  combining  life  insurance 
with  more  or  less  of  social  objects. 

Both  methods  of  furnishing  life  insurance  on  the  assess- 
ment plan  flourished  during  the  seventies  and  eighties.  It 
was  cheap  insurance  again,  and  proved  popular.  In  1880 


LIFE  INSURANCE  IN  THE  UNITED  STATES        95 

no  less  than  236  of  the  business  assessment  organizations 
had  been  chartered  by  Pennsylvania  alone.  By  1885 
fifty-six  had  been  chartered  by  Massachusetts.  By  1889, 
the  country  over,  the  business  assessment  associations 
had  a  billion  dollars  more  insurance  in  force  than  did  the 
old  line  companies.  Their  life,  however,  was  to  be  short. 
Conducted  on  unscientific  plans,  these  companies  soon  com- 
menced to  fail.  In  the  early  nineties,  they  failed  in  large 
numbers.  Some  state  legislatures,  finally  realizing  the 
weaknesses  of  the  plan,  passed  prohibitory  laws,  and  at 
the  present  time  the  assessment  companies  conducted 
merely  as  a  business  venture  are  of  little  importance  in  the 
life  insurance  world. 

Assessmentism  as  developed  by  the  fraternal  society  had 
a  slower  development.  The  fraternals,  while  growing  more 
slowly,  have  had  sources  of  power  which  the  business  assess- 
ment does  not  possess.  The  fraternal  ties  keep  men  in 
the  order  long  after  they  would  have  stopped  paying  assess- 
ments to  a  business  company.  Again,  they  have  been 
almost  untrammeled  by  state  law.  Having  close  organ- 
izations, the  political  party  in  power  has  not  dared  to 
enact  legislation  inimical  to  the  desires  of  the  fraternalists, 
so  that  even  yet  in  most  of  the  states  the  fraternal  orders 
are  not  subjected  to  any  supervision  whatever.  To-day 
fully  seven  million  people  are  insured  in  the  fraternal 
orders  in  the  United  States,  two  million  more  than  are 
insured  in  the  level  premium  companies. 

In  concluding  this  sketch  of  American  life  insurance, 
let  us  consider  the  more  important  problems  connected 
with  the  business  to-day.  In  the  old  line  field  there  is 
the  important  one  of  the  influx  of  new  companies.  As  a 
result  of  the  exposures  in  1905  there  developed  almost  a 
mania  for  new  companies  in  the  We.sL.and  South.  At  least 
two  hundred  new  companies  have  been  organized.  This 
seems  too  many.  Competition  between  them  and  with 
the  old  companies  will  be  so  keen  that  many  companies  will 
not  be  able  to  continue.  There  will  be  probably  a  period 


96  YALE  READINGS  IN  INSURANCE 

of  failures  and  receiverships  somewhat  akin  to  that  of  the 
seventies,  but  without  the  disastrous  effects  upon  the  busi- 
ness which  the  failures  in  the  seventies  caused. 

A  second  important  problem  is  what  to  do  with  the 
fraternals.  Something  should  be  done.  The  assessment 
plan  of  collecting  premiums  cannot  but  result  in  failure 
and  disappointment.  These  associations  educate  some 
men  to  take  out  level  premium  policies,  but  in  too  many 
cases  failures  of  the  fraternals  give  men  an  excuse  for  not 
insuring  at  all.  Some  of  the  fraternal  societies  are  volun- 
tarily adopting  the  level  premium  system,  and  if  it  proves 
successful,  the  movement  may  solve  one  of  the  greatest 
problems  in  American  life  insurance,  the  problem  of  heavy 
expenses.  The  state  should  encourage  these  transformed 
societies  and  provide  that  no  more  on  the  old  assessment 
plans  shall  now  be  organized. 

Lastly,  of  many  important  problems  which  may  be  men- 
tioned is  the  problem  of  securing  good  management  of  the 
level  premium  companies.  There  are  companies  which 
to-day  have  five  hundred  millions  of  invested  funds,  and 
the  power  which  control  of  such  sums  involves  is  enormous. 
Can  big  enough  men  be  found  to  entrust  with  such  power, 
and  will  they  be  found?  What  can  the  states  do  to  help? 
If  proper  management  can  be  secured,  life  insurance  in  the 
United  States  has  just  begun  its  development. 


CHAPTER  VII 

THE  THEORY   OF  RISK  l 

To  live  and  labor  in  uncertainty  is  the  common  lot  of 
all  men.  Life  and  health,  property  and  income,  are  all 
exposed  to  countless  dangers.  The  precariousness  of  the 
results  of  human  effort  has  been  a  favorite  theme  of  poets 
and  philosophers  of  all  ages.  "The  best  laid  schemes  o' 
mice  an'  men  gang  aft  agley,"  and  the  possibility  of  such 
a  mischance  profoundly  modifies  the  conduct  of  rational 
beings.  In  their  economic  activity  in  particular  the  in- 
fluence of  uncertainty  can  be  clearly  discerned.  While 
exact  mathematical  measurements  are  in  the  nature  of 
the  case  impossible,  the  direction  of  this  influence,  and  to 
an  approximate  extent  its  degree,  may  be  ascertained. 
It  has  long  been  considered  a  commonplace  of  economic 
theory  that  the  reward  of  capital,  and  to  a  less  extent  the 
reward  of  labor,  varies  directly  as  the  degree  of  risk  to 
which  they  are  exposed  as  a  result  of  their  economic 
activity.  But  until  recently,  no  attempt  has  been  made 
to  isolate  the  phenomena  of  risk  and  risk-taking,  and  to 
determine  the  laws  which  govern  them.  The  new  interest 
in  the  subject  has  sprung  for  the  most  part  from  discus- 
sions as  to  the  exact  nature  of  the  function  and  reward 
of  the  entrepreneur.  Professor  Mangoldt  in  Germany, 
and  Mr.  Hawley  in  the  United  States,  have  made  inde- 
pendent attempts  to  elaborate  a  theory  of  distribution  in 
which  the  assumption  of  certain  risks  shall  be  the  special 

1  By  Allan  H.  Willett,  Instructor  in  Economics,  Carnegie  Technical 
Schools.  Reprinted  from  pages  25-34  of  the  "Economic  Theory  of 
Risk  and  Insurance";  Columbia  University  Press.  New  York,  1901. 

97 


98  YALE  READINGS  IN  INSURANCE 

function  of  the  entrepreneur,  and  his  income  the  reward 
for  risk-taking;  and  though  few  writers  have  adopted 
their  general  doctrine,  the  notion  that  in  some  way  the 
function  of  the  entrepreneur  has  a  peculiar  connection 
with  risk  is  by  no  means  uncommon.  In  all  the  previous 
discussions,  however,  one  will  search  in  vain  for  a  thorough 
treatment  of  the  nature  of  economic  risk  and  the  way  in 
which  its  influence  makes  itself  felt. 

We  are  told  by  the  philosophers  that  all  the  activities 
of  the  universe  are  obedient  to  law.  Nowhere  have  they 
left  any  opportunity  for  the  intrusion  of  chance.  Events 
which  appear  to  take  place  in  a  purely  accidental  way  are 
just  as  much  determined  as  those  whose  occurrence  can 
be  accurately  foretold.  The  appearance  of  accident  is  due 
entirely  to  human  limitations.  It  is  because  we  do  not 
know  all  the  previous  conditions  or  all  the  laws  governing 
them  that  a  particular  phenomenon  appears  to  us  to  occur 
by  chance.  In  this  sense,  then,  chance  is  purely  subjec- 
tive; it  is  merely  an  appearance,  resulting  from  the  im- 
perfection of  man's  knowledge,  and  not  a  part  of  the  course 
of  external  nature.  But  'the  term  may  be  used  also  in  an 
objective  sense.  By  chance  in  that  sense  is  meant  the 
degree  of  probability  that  a  particular  event  will  occur, 
as  it  is  estimated  with  the  aid  of  all  the  attainable  knowl- 
edge of  the  preceding  conditions.  If  the  only  fact  known 
about  the  condition  of  a  number  of  balls  in  a  bottle  is 
that  there  is  an  equal  number  of  white  ones  and  of  black 
ones,  there  is  an  even  chance  that  the  first  ball  to  come 
out  will  be  white,  and  this  chance  is  independent  of  any 
personal  peculiarities  of  the  person  who  estimates  it.  It 
is  in  this  objective  sense  that  the  term  is  commonly  used, 
and,  to  avoid  any  possibility  of  ambiguity,  it  is  in  this 
sense  alone  that  it  will  be  used  in  the  following  pages. 
By  chance  will  be  meant  the  degree  of  probability  of  the 
occurrence  of  any  future  event.1  It  may  vary  all  the  way 

1  This  term  may  also  be  used  to  denote  the  probability  that  an 
event  has  occurred  in  the  past,  when  it  is  impossible  to  obtain  any 


THE  THEORY  OF  RISK  99 

from  absolute  certainty  that  an  event  will  not  occur, 
through  the  different  degrees  of  probability,  to  absolute 
certainty  that  it  will  occur. 

Chance  affects  economic  activity  through  the  psycho- 
logical influence  of  uncertainty.  Man's  conduct  is  modi- 
fied in  one  way  by  coming  events  which  he  can  definitely 
foresee  and  provide  for,  though  he  can  do  nothing  to  pre- 
vent their  occurrence;  it  is  affected  in  a  different  way  by 
events  which  are  only  possible,  and  which  may  never 
occur,  or  may  occur  at  an  unexpected  time.  In  the  latter 
case  he  will  not  act  just  as  he  would  if  he  knew  that  they 
would  occur,  and  occur  at  a  definite  time,  and  he  will  not 
act  just  as  he  would  if  he  knew  they  would  not  occur  at 
all.  His  conduct  will  be  modified  by  the  very  uncertainty 
as  to  the  occurrence  of  the  future  event,  that  is,  by  what 
appears  to  him  as  chance. 

A  distinction  must  be  made  and  kept  clearly  in  mind 
between  the  chance,  or  the  degree  of  probability,  and  the 
degree  of  uncertainty.  Manifestly  the  greatest  degree  of 
uncertainty  does  not  accompany  the  greatest  degree  of 
probability.  When  the  chance  is  zero,  the  uncertainty 
is  also  zero.  A  slight  degree  of  probability  brings  with  it 
a  slight  degree  of  uncertainty.  But  the  two  cannot  go 
on  indefinitely  increasing  at  the  same  rate,  as  at  the  end 
of  the  series  we  should  have  the  absurd  combination  of 
the  highest  degree  of  probability,  which  is  certainty, 
with  the  highest  degree  of  uncertainty.  The  uncertainty 
is  the  greatest  when  the  chances  are  even,  that  is,  when 
the  degree  of  probability  is  represented  by  the  fraction  J. 
In  such  a  case  we  say  that  there  is  nothing  to  show  what 
the  outcome  will  be.  As  we  go  from  an  even  chance  either 
towards  greater  probability  or  towards  less  probability, 
the  uncertainty  diminishes,  and  at  either  end  of  the 
series  it  entirely  disappears.  For  example,  there  is  an 

certain  information  about  it.  Premiums  for  the  insurance  of  over- 
due ships  are  determined  partly  by  the  chance  of  loss  as  estimated 
from  past  experience. 


100  YALE  READINGS  IN  INSURANCE 

even  chance  that  the  first  card  drawn  from  a  perfect  pack 
will  be  red  or  black,  and  there  is  absolute  uncertainty  as 
to  which  it  will  be.  If,  however,  one  of  the  red  suits  is 
replaced  by  a  third  black  suit,  the  degree  of  probability 
is  altered.  The  chance  of  drawing  a  red  card  is  now  one  in 
four,  and  the  chance  of  drawing  a  black  one  is  three  in 
four.  The  chance  has  been  increased  or  decreased,  accord- 
ing to  the  color  whose  appearance  is  made  the  basis  of 
comparison.  But  the  degree  of  uncertainty  has  been 
reduced,  and  this  is  equally  true  of  the  uncertainty  about 
the  appearance  of  either  color.  And  after  a  black  suit 
has  been  substituted  for  the  remaining  red  suit,  the  chance 
of  drawing  a  red  card  has  been  reduced  to  zero,  and  the 
chance  of  drawing  a  black  card  has  been  increased  to  a 
hundred  per  cent.,  while  all  uncertainty  as  to  which  color 
will  be  drawn  has  disappeared. 

I  have  dwelt  at  such  length  upon  this  simple  distinction 
because  of  its  fundamental  importance  for  the  deter- 
mination of  the  nature  of  risk.  The  word  risk,  as  it  is 
employed  in  common  speech,  is  by  no  means  free  from 
ambiguity.  It  is  sometimes  used  in  a  subjective  sense 
to  denote  the  act  of  taking  a  chance,  but  more  commonly 
and  preferably  in  an  objective  sense  to  denote  some  con- 
dition of  the  external  world.  To  avoid  ambiguity  its 
use  in  the  following  pages  will  be  confined  to  this  latter 
sense.  The  act  of  incurring  a  risk  will  be  called  risk- 
taking  or  the  assumption  of  risk. 

But  even  when  used  in  this  objective  sense  its  significance 
is  not  always  the  same.  It  is  possible  to  think  of  risk 
either  in  relation  to  probability  or  in  relation  to  uncer- 
tainty. As  the  degree  of  probability  of  loss  increases 
from  zero  to  one  hundred  per  cent.,  the  degree  of  risk  may 
be  said  to  increase  pari  passu.  This  is  undoubtedly  the 
way  in  which  the  term  is  ordinarily  used.  A  person  who 
should  enter  upon  an  undertaking  in  which  the  chances 
were  ninety  in  a  hundred  that  it  would  result  in  failure 
would  undoubtedly  be  said  to  run  a  tremendous  risk. 


THE  THEORY  OF  RISK  101 

But  if  the  term  is  used  in  this  sense,  it  will  not  be  true,  as 
I  shall  attempt  to  show  later  on  that  the  special  net  reward 
for  assuming  risk  invariably  increases  as  the  degree  of 
risk  increases.  This  net  premium  increases  as  the  uncer- 
tainty increases;  but  after  the  point  of  even  chances  is 
passed,  the  uncertainty  diminishes  as  the  probability 
increases.  Beyond  that  point,  therefore,  the  net  premium 
for  risk-taking  will  also  diminish  as  the  probability  of  the 
occurrence  of  the  loss  increases.  When  the  loss  is  certain 
to  occur  the  premium  entirely  disappears,  as  in  the  case 
of  the  ordinary  replacement  of  capital  used  up  in  pro- 
ductive operations.  As,  however,  the  risks  assumed  in 
industrial  life  are  usually  well  below  the  point  of  even 
chances,  so  that  the  uncertainty  as  to  the  outcome  in- 
creases as  the  probability  of  loss  increases,  it  will  be  more 
convenient  to  continue  the  discussion  as  though  such 
risks  only  were  to  be  considered.  Whatever  statements 
are  intended  to  apply  to  greater  chances  will  be  put  in  a 
form  that  will  make  their  application  clear. 

This  is  not  the  place  to  undertake  to  establish  the  law 
laid  down  above.  My  only  reason  for  mentioning  it  here 
is  to  show  why  it  seems  necessary  to  define  risk  with 
reference  to  the  degree  of  uncertainty  about  the  occurrence 
of  a  loss,  and  not  with  reference  to  the  degree  of  probability 
that  it  will  occur.  Risk  in  this  sense  is  the  objective  cor- 
relative of  the  subjective  uncertainty.  It  is  the  uncer- 
tainty considered  as  embodied  in  the  course  of  events  in 
the  external  world,  of  which  the  subjective  uncertainty 
is  a  more  or  less  faithful  interpretation.1 

Considering  risk  in  this  sense,  we  find  that  the  method 

1  This  definition  involves  considerable  departure  from  ordinary 
usage.  The  word  uncertainty  might  be  used  in  this  objective  sense, 
or  a  new  term  might  be  coined  to  designate  its  objective  aspect. 
But  it  has  seemed  better  to  keep  to  the  term  ordinarily  used  by  econ- 
omists in  this  connection.  It  is  important  not  only  to  develop  more 
clearly  than  has  yet  been  done  the  effect  of  risk  on  economic  activity, 
but  also  to  note  that  many  of  the  statements  commonly  made  about 
it  are  true  only  when  the  term  is  defined  in  this  way. 


102  YALE  READINGS  IN  INSURANCE 

by  which  the  degree  of  risk  may  be  ascertained  depends 
upon  the  relative  perfection  of  the  knowledge  of  preceding 
conditions.  In  some  cases  it  may  be  known  directly 
from  the  circumstances  attending  it.  The  uncertainty 
about  the  color  of  a  card  drawn  at  random  from  a  perfect 
pack  is  of  this  kind.  No  one  would  consider  that  the 
chance  at  the  tenth  trial  was  altered  by  the  fact  that  at 
every  one  of  the  preceding  nine  trials  a  red  card  had  been 
drawn.  But  when  no  such  definite  knowledge  of  preceding 
conditions  is  attainable,  the  degree  of  risk  is  estimated  in 
a  different  way.  It  is  ascertained  by  applying  the  laws 
of  probability  to  the  accumulated  results  of  past  experi- 
ence. The  chance  that  a  particular  loss  will  occur  is 
denoted  by  the  fraction  expressing  the  ratio  between  the 
actual  number  of  such  losses  and  the  possible  number  in  a 
given  period  of  time.  If  during  each  year  for  a  series  of 
years  the  loss  has  been  one  in  one  hundred  in  the  case  of 
buildings  of  a  certain  kind,  the  chance  that  a  similar 
building  will  be  destroyed  during  the  following  year  is 
expressed  by  the  fraction  T^  —  on  condition  that  there 
is  no  appreciable  change  in  the  methods  adopted  for  pre- 
venting loss.  If  for  the  moment  we  assume  that  it  is 
known  that  the  actual  number  of  losses  every  year  will 
correspond  with  the  average  number,  the  only  uncertainty 
for  the  group  as  a  whole  will  be  as  to  which  of  the  buildings 
will  be  the  one  to  suffer  the  loss.  The  chance  that  any 
particular  building  will  be  destroyed  will  be  one  in  a  hun- 
dred, but  the  number  of  losses  for  the  group  as  a  whole 
will  be  fixed. 

But  as  a  matter  of  fact  the  loss  for  the  group  as  a  whole 
is  not  likely  to  correspond  exactly  with  the  average  loss 
as  determined  by  past  experience.  The  actual  number 
of  losses  in  any  year  will  vary  more  or  less  from  the  aver- 
age. This  variation  is  not  absolutely  indefinite.  By  the 
laws  of  chance  a  figure  can  be  obtained  which  will  indicate 
the  probable  variation  of  the  actual  number  of  losses  from 
the  average.  This  figure  will  vary  in  different  cases  accord- 


THE  THEORY  OF  RISK  103 

ing  to  the  nature  of  the  series  from  which  the  average  has 
been  obtained.  The  probable  variation  will  be  much  less  in 
the  case  of  a  series  in  which  the  losses  from  year  to  year 
have  varied  little  from  the  average,  than  it  will  be  in  the 
case  of  a  series  which  shows  great  fluctuations.  Thus,  to 
take  a  simple  illustration,  if  the  losses  for  four  years  have 
been  1,  11,  30,  and  18  per  hundred,  the  average  is  15  per 
hundred,  but  it  is  evident  that  the  actual  number  may 
vary  greatly  from  the  average.  If  on  the  other  hand  the 
series  had  been  13,  14,  16,  and  17,  while  the  average  would 
have  been  the  same  as  before,  the  actual  number  for  the 
following  year  would  be  much  more  likely  to  be  near  the 
average.  The  probable  variation  of  the  actual  number 
of  losses  from  the  average  may  be  ascertained  by  calcu- 
lating the  average  of  the  actual  variations  during  the  series 
of  years  under  observation.  Thus  in  the  first  illustration 
given  above,  the  variations  were  respectively  14,  4,  15, 
and  3,  giving  an  average  variation  of  9.  In  the  second 
series  the  variations  were  2,  1,  1,  and  2,  and  the  average 
was  1|.  It  is  evident,  therefore,  that  the  greater  the 
fluctuations  are  from  year  to  year  in  the  number  of  losses, 
the  greater  is  the  uncertainty  as  to  the  number  which  will 
occur  in  a  particular  year.  It  must  be  borne  in  mind 
that  risk  is  connected  with  the  uncertainty.  If  the  num- 
ber of  losses  may  vary  from  1  to  30,  the  area  of  uncertainty 
includes  the  entire  number  of  possible  losses;  but  if  the 
number  may  vary  only  from  13  to  17,  that  whatever  may 
be  the  uncertainty  about  the  fate  of  any  particular  build- 
ing, for  the  group  as  a  whole  13  losses  can  be  counted  upon, 
and  the  area  of  uncertainty  includes  only  the  5  losses  from 
the  13th  to  the  17th. 

This  distinction  between  the  certain  and  the  uncertain 
losses  is  of  the  utmost  importance.  If,  as  I  shall  attempt 
to  show,  uncertainty  imposes  a  cost  upon  society,  the 
removal  of  the  uncertainty  will  in  itself  be  a  source  of 
gain.  Not  that  the  replacement  of  the  possibility  of  a 
small  amount  of  loss  by  the  certainty  of  a  large  amount 


104  YALE  READINGS  IN  INSURANCE 

would  result  in  a  net  gain.  The  effect  of  the  occurrence 
of  disaster  is  in  itself  the  same,  whether  it  was  foreseen 
or  not.  It  is  the  destruction  of  a  certain  amount  of  capi- 
tal. But  the  net  result  of  the  occurrence  of  a  certain 
amount  of  loss  which  was  definitely  foreseen  is  different 
from  the  net  result  of  the  occurrence  of  the  same  amount 
of  loss  plus  previous  uncertainty  whether  it  would  be 
greater  or  smaller.  And  the  influence  of  the  latter  element 
is  greater  when  the  anticipation  of  future  loss  is  based 
on  an  average  obtained  from  a  fluctuating  series  of  past 
losses.  The  greater  the  probable  variation  of  the  actual 
loss  from  the  average,  the  greater  the  degree  of  uncer- 
tainty. 

Finally  it  must  be  noted  that  the  probable  variation 
varies  with  the  number  of  cases  included  in  a  group. 
According  to  the  well-known  statistical  law,  the  figure 
denoting  the  probable  variation  increases  only  as  the  square 
root  of  the  number  of  cases.  Increasing  the  number  of 
similar  risks  a  hundred-fold  increases  the  probable  variation 
by  only  tenfold.  If,  for  example,  we  assume  that  past 
experience,  based  on  the  observation  of  10,000  cases  for  a 
number  of  years,  has  shown  that  on  the  average  one  house 
in  every  thousand  is  destroyed  by  fire  each  year,  the 
average  loss  has  been  10  houses  a  year.  But  the  actual 
loss  has  varied  from  year  to  year.  The  probable  variation 
of  the  actual  loss  from  the  average  can  be  determined  only 
by  a  calculation  based  on  the  actual  losses  during  the 
years  under  observation.  But  we  will  assume  that  for 
10,000  cases  this  variation  is  5.  Then  if  there  is  no  change 
in  the  chance  of  destruction  to  which  the  houses  are  ex- 
posed, the  loss  next  year  will  probably  be  between  5  and  15. 
It  is  probable  that  as  many  as  5  and  no  more  than  15  of 
the  houses  will  burn.  The  area  of  uncertainty,  then,  is 
10,  or  -^  of  1  per  cent,  of  the  number  of  cases.  If  we  now 
increase  the  number  of  houses  exposed  to  the  same  danger 
a  hundred-fold,  from  10,000  to  1,000,000,  the  average  loss 
will  be  1000,  but  the  probable  variation  of  the  actual  loss 


THE  THEORY  OF  RISK  105 

from  the  average  will  not  increase  a  hundred-fold,  from  5 
to  500,  but  only  tenfold,  from  5  to  50.  The  actual  loss 
next  year  will  probably  be  between  950  and  1050.  The 
area  of  uncertainty  is  now  100,  or  T^  of  1  per  cent,  of  the 
number  of  cases.  We  have  used  the  term  area  of  uncer- 
tainty to  denote  the  number  of  cases  lying  between  the 
largest  probable  number  of  losses,  or  the  average  plus  the 
probable  variation,  and  the  smallest  probable  number, 
or  the  average  minus  the  probable  variation.1  We  may 
say,  then,  that  the  area  of  uncertainty  increases  as  the 
square  root  of  the  number  of  cases,  and  that  its  ratio  to  the 
entire  number  of  cases  becomes  correspondingly  less. 

Risk,  in  the  sense  in  which  we  are  to  use  the  term,  is,  so 
to  speak,  the  objectified  uncertainty  as  to  the  occurrence 
of  an  undesired  event.  It  varies  with  the  uncertainty 
and  not  with  the  degree  of  probability.  In  that  sense 
the  degree  of  risk  in  any  individual  case  is  a  definite  quan- 
tity. It  may  be  ascertained  in  some  cases  by  direct 
observation  of  the  conditions  on  which  the  possibility 
of  the  occurrence  of  the  event  depends.  When  such 
knowledge  can  not  be  obtained  directly,  it  is  sought 
indirectly  by  a  statistical  study  of  the  results  of  past 
experience.  The  chance  of  the  occurrence  of  a  loss  is 
denoted  by  the  fraction  expressing  the  ratio  between  the 
actual  number  of  losses  and  the  possible  number  in  a 
given  period  of  time.  The  value  of  this  figure  varies 
with  the  regularity  of  the  series  from  which  it  has  been 
obtained.  There  is  greater  uncertainty  about  the  number 
of  losses  that  will  occur  in  a  given  year  when  the  average 

1 1  need  not  point  out  that  the  average  variation  itself  denotes 
only  a  probability  and  not  a  certainty.  There  is  additional  uncer- 
tainty as  to  the  extent  to  which  the  actual  variation  in  any  year  will 
vary  from  the  probable.  I  have  not  thought  it  necessary  to  consider 
the  various  devices  of  the  mathematicians  for  obtaining  more  signifi- 
cant figures  than  averages.  My  only  purpose  is  to  show  that  with 
the  increase  in  the  number  of  cases  the  actual  degree  of  uncertainty 
for  the  entire  group  diminishes,  and  that  fact  is  sufficiently  well  brought 
out  by  the  use  of  crude  averages. 


106  YALE  READINGS  IN  INSURANCE 

has  been  obtained  from  a  fluctuating  series  than  when  it 
has  been  obtained  from  one  which  was  comparatively 
uniform.  The  figure  expressing  the  average  variation  of 
the  actual  losses  from  the  average  loss  for  a  number  of 
years  is  called  the  probable  variation.  The  greater  the 
ratio  between  the  probable  variation  and  the  whole  num- 
ber of  cases,  the  greater  is  the  uncertainty.  The  probable 
variation  increases  only  as  the  square  root  of  the  number 
of  cases,  therefore  its  ratio  to  the  whole  number  becomes 
less  as  the  number  is  increased.  Consequently  the  more 
individual  cases  there  are  included  in  a  group,  the  less  is 
the  uncertainty  as  to  the  amount  of  loss  which  the  group 
as  a  whole  will  suffer. 


CHAPTER  VIII 

MORTALITY  TABLES  1 

TABLES  of  mortality,  although  they  form  the  scientific 
basis,  were  very  little  used  for  life  assurance  purposes 
until  towards  the  end  of  the  eighteenth  century,  after  the 
Northampton  tables  had  been  published.  Other  tables 
were  in  existence  nearly  one  hundred  years  before,  one  of 
the  first  being  that  compiled  from  the  statistics  of  the 
population  of  the  town  of  Breslau  in  Silesia  by  the  British 
Astronomer-Royal,  Halley,  and  published  in  1692.  Halley 
at  the  same  time  advocated  correct  principles  for  annui- 
ties and  assurances,  which  were  not  adopted  until  nearly 
seventy  years  later. 

There  are  two  principal  sources  for  obtaining  such  in- 
formation as  is  necessary  for  compiling  a  good  mortality 
table,  namely: 

(1)  Population  statistics,  including  registers  of  births 
and  deaths;  and 

(2)  Life  assurance  statistics. 

Other  sources  are  occasionally  used,  such  as  particulars 
of  peerage  families  which  have  been  carefully  recorded 
and  published  for  many  generations;  widows'  and  pension 
funds;  employees  in  large  corporations;  army  and  navy 
statistics,  etc.,  etc.;  but  the  two  above  mentioned  are 
sufficient  for  our  present  consideration,  as  they  bring  under 
review  all  the  salient  features  of  mortality. 

In  order  to  form  tables  correctly  from  population 
records,  it  is  necessary  to  have  an  enumeration  of  the 

1  By  Henry  Moir,  Associate  Actuary  of  the  Home  Life  Insurance 
Company  of  New  York.  Reprinted  from  pages  32-45  of  the  "  Life 
Assurance  Primer";  C.  C.  Hine's  Sons  Company.  New  York,  1904. 

107 


108  YALE  READINGS  IN  INSURANCE 

people  with  their  ages,  together  with  a  record  of  the  deaths 
which  take  place  and  the  ages  at  death.  Even  with  such 
statistics,  the  results  are  influenced  by  movements  in 
population  in  the  nature  of  emigration  or  immigration 
during  the  period  over  which  the  observations  extend. 
Frequently,  also,  when  an  enumeration  of  population  is 
taken,  the  ages  are  misstated  or  given  approximately. 
Discriminating  judgment  is  essential  in  dealing  with 
mortality  statistics  —  otherwise  erroneous  conclusions 
may  be  reached. 

The  Northampton  table  may  be  taken  as  an  interesting 
example  of  erroneous  construction,  because  Dr.  Price, 
who  published  the  table  in  1783,  ignored  several  important 
factors  affecting  the  mortality.  The  statistics  on  which 
he  based  his  results  consisted  of  a  record  of  the  deaths  in 
two  parishes  in  the  town  of  Northampton.  No  enumera- 
tion of  the  population  was  taken,  but  the  tables  were 
formed  from  the  deaths,  with  ages  at  death.  Dr.  Price 
had  also  a  record  of  the  baptisms  which  had  taken  place 
in  the  community,  and  he  found  that  the  number  of 
deaths  exceeded  the  baptisms  in  the  period  under  obser- 
vation (1735-1780).  He  therefore  assumed  that  the 
additional  deaths  were  caused  by  immigration  into  North- 
ampton at  the  age  of  20.  As  a  matter  of  fact,  however, 
the  additional  deaths  were  largely  the  result  of  baptisms 
being  less  numerous  than  the  births.  There  were  many 
Baptists  in  the  town,  and  the  names  of  their  children  did 
not  appear  on  the  records  of  christenings.  The  baptismal 
records  were  on  an  entirely  different  basis  from  the  death 
records,  and  they  should  not  have  been  used  together. 
The  assumption  above  mentioned  was  therefore  inaccurate, 
and  moreover  the  mortality  of  the  two  parishes  from  which 
the  figures  were  taken  was  higher  than  the  average  of 
other  towns;  so  that  the  Northampton  table  was  in  several 
respects  unreliable.  It  was,  however,  extensively  used 
for  many  years;  and,  as  it  showed  excessive  mortality, 
large  profits  were  earned  by  life  assurance  companies 


MORTALITY  TABLES  109 

which  adopted  its  figures.  On  the  contrary,  annuity 
companies  suffered  severely  because  their  annuitants 
lived  longer  than  the  table  indicated.  It  is  a  strange  and 
unaccountable  fact  that  this  Northampton  table  is  still 
used  in  the  United  States  for  certain  legal  purposes,  and 
in  some  courts  appears  to  be  the  only  recognized  table  of 
mortality. 

On  the  other  hand,  the  Carlisle  table  may  be  quoted 
as  one  which  was  prepared  on  scientific  principles  and 
from  satisfactory  statistics.  This  table  was  published 
in  1815  by  Joshua  Milne.  It  was  constructed  from  a 
census  of  the  population  of  two  parishes  in  Carlisle  in 
1780,  and  the  deaths  in  the  same  parishes  from  1779  to 
1787  inclusive.  It  is  usually  supposed  that  a  second 
census  was  taken  in  1787;  but  the  figures  themselves  in- 
dicate that  this  is  doubtful.  Anyhow,  it  was  found  that 
an  increase  (treated  as  being  exactly  1000)  in  the  popula- 
tion had  taken  place,  and  allowance  had  to  be  made  for 
this  increase  as  affecting  the  deaths  also,  so  that  the  ratio 
of  the  deaths  to  the  numbers  living  could  be  satisfactorily 
obtained.  There  was  a  larger  proportion  of  female  than 
of  male  lives  included  in  the  statistics,  and  the  result  was 
to  show  light  mortality  at  the  older  ages.  The  table  has 
been  very  extensively  used,  and  even  to  the  present  day 
is  considered  of  great  value,  especially  in  the  calculation 
of  survivorship  benefits.  For  general  life  assurance  pur- 
poses, however,  it  has  been  superseded  by  tables  formed 
from  mortality  amongst  assured  lives. 

Mortality  tables  from  the  general  population  of  England 
have  been  formed  on  five  occasions,  the  latest  having  been 
published  in  1897,  dealing  with  the  period  from  1881  to 
1890.  The  mortality  of  the  entire  population  was  given 
and  compared  with  that  in  various  occupations.  A  most 
useful  series  of  tables  was  submitted,  with  details  of 
mortality  in  one  hundred  different  occupations,  showing 
not  only  the  mortality  rates  in  those  occupations,  but 
giving  also  the  causes  of  death. 


110  YALE  READINGS  IN  INSURANCE 

One  of  the  population  tables  has  received  more  promi- 
nence than  others,  namely;  the  healthy  English  table. 
It  was  formed  by  Dr.  Farr  from  the  census  returns  of  1851, 
and  the  records  of  the  births  and  deaths,  from  1848  to  1853 
inclusive,  in  63  of  the  healthiest  registration  districts  of 
England  and  Wales.  In  all  of  these  districts  the  mortality 
of  the  general  population  did  not  exceed  the  rate  of  17 
annual  deaths  to  1000  living;  and  at  the  census  of  1851 
the  total  population  in  these  selected  districts  was  nearly 
one  million  persons,  of  whom  about  493,000  were  males 
and  503,000  females.  The  mortality  of  the  sexes  was 
investigated  separately.  This  table  (male  section)  was 
selected  by  a  committee  of  the  Actuarial  Society  of  America 
for  comparison  with  the  specialized  mortality  afterwards 
referred  to,  with  slight  modifications  at  ages  under  21  and 
at  ages  from  51  to  60,  and  with  a  special  adjustment  for 
the  reduced  mortality  arising  from  medical  selection 
during  the  first  five  years  of  assurance. 

The  records  of  life  assurance  companies  are  almost  free 
from  the  errors  and  misstatements  to  which  population 
statistics  are  subject.  The  ages  of  those  who  take  out 
policies  are  correctly  taken,  and  a  complete  record  is  kept 
from  which  can  be  obtained  the  number  under  observation 
at  any  age,  and  the  number  of  deaths  which  take  place 
amongst  them.  The  first  table  formed  from  the  experi- 
ence of  a  life  assurance  company  was  prepared  by  Mr. 
Arthur  Morgan,  Actuary  of  the  old  Equitable  Society, 
and  published  in  1834.  The  records  of  any  individual 
company  are  not,  however,  so  valuable  as  records  formed 
from  a  group,  because  individual  companies  have  fre- 
quently peculiar  conditions  affecting  their  mortality, 
while  a  group  is  more  likely  to  represent  a  fair  average, 
such  as  may  be  equaled  by  any  well-managed  corpora- 
tion. 

Accordingly,  in  1843,  there  was  published  the  experience 
of  17  life  assurance  companies,  now  known  in  America 
as  the  "Actuaries"  or  the  "Combined  Experience"  table. 


MORTALITY  TABLES  111 

The  statistics  from  which  that  experience  was  compiled 
embraced  nearly  84,000  policies  running  from  1762  to 
1833,  of  which  nearly  14,000  terminated  by  death.  The 
average  duration  of  all  the  policies  was  less  than  eight  and 
one-half  years.  The  mortality  amongst  females  was  taken 
out  separately  and  it  was  found  that  between  ages  20  and 
50  the  mortality  was  considerably  heavier  than  amongst 
males,  but  the  reverse  was  the  case  above  age  50. 

This  condition  as  regards  male  and  female  mortality 
has  been  confirmed  from  many  other  sources.  Amongst 
annuitants,  however,  even  at  the  younger  ages  the  mor- 
tality of  females  is  less  than  that  of  males;  and  a  careful 
distinction  must  therefore  be  drawn  regarding  the  nature 
of  the  contract  entered  into.  The  reason  for  the  different 
condition  at  younger  ages  probably  is  that  annuities  are 
generally  purchased  on  the  lives  of  spinsters  and  widows 
in  good  circumstances;  while  in  life  assurance  transactions 
the  same  conditions  do  not  so  frequently  apply. 

The  American  experience  table  of  mortality,  now 
recognized  as  the  standard  table  in  the  United  States,  was 
formed  by  Sheppard  Homans  and  was  first  published  in  a 
schedule  attached  to  an  act  passed  by  the  legislature  of 
the  State  of  New  York  on  May  6,  1868.  The  author  never 
gave  full  particulars  of  the  data  employed.  It  is  gener- 
ally supposed  that  he  used  the  mortality  statistics  deduced 
from  the  experience  of  the  Mutual  Life  Insurance  Com- 
pany of  New  York  as  his  basis,  but  these  figures  were  in- 
adequate at  the  older  ages  and  accordingly  he  must  have 
arbitrarily  adjusted  the  table.  It  has  been  very  much 
used,  and  has  grown  in  popularity  because  it  is  found 
to  represent  faithfully  the  American  mortality  amongst 
assured  lives  after  the  first  effects  of  selection  have  dis- 
appeared. It  is  now  generally  prescribed  in  the  state  laws 
as  the  standard  for  valuation  purposes.  Moreover,  the 
table  has  been  successfully  graduated  by  Makeham's  law 
of  mortality,  so  that  the  calculation  of  complex  benefits  is 
thereby  made  comparatively  simple. 


112  YALE  READINGS  IN  INSURANCE 

Many  other  important  tables  of  mortality  have  been 
formed,  but  there  is  no  need  to  enter  into  minute  details 
of  these,  as  such  details  do  not  involve  particular  princi- 
ples. Three  different  tables  have  been  constructed  from 
the  experience  of  annuitants,  more  or  less  directly  con- 
nected with  the  British  government  schemes.  The  first 
two  of  these  tables,  published  in  1829  and  1863  respect- 
ively, included  some  special  lives  carefully  selected  by 
speculators  who  purchased  annuities  and  drew  the  pro- 
ceeds for  their  own  advantage,  a  practice  which  was  after- 
wards discontinued  by  law  in  Great  Britain.  They  also 
included  certain  old  tontine  funds  formed  in  the  seventeenth 
and  eighteenth  centuries.  But  the  last  of  such  tables, 
published  in  1883,  gave  statistics  of  government  annuitants 
only.  The  rates  of  mortality  shown  by  the  three  sets  of 
tables  do  not  differ  to  any  material  extent,  and  they  all 
prove  that  female  annuitants  are  much  healthier  than 
male.  The  same  feature  is  still  more  marked  in  the  latest 
publication  relating  to  the  mortality  amongst  annuitants, 
namely:  the  British  Offices  Life  Annuity  Experience, 
published  in  1903.  For  example,  the  expectation  of  life 
at  age  50  of  a  male  annuitant  is  20.7  years,  while  the  cor- 
responding expectation  of  a  female  annuitant  is  almost 
23  years.  This  experience  embraced  a  period  from  1863 
to  1893,  and  included  particulars  of  about  10,000  male 
lives  and  25,000  female  lives. 

The  most  important  investigations  of  recent  years  are 
those  conducted  by  the  British  actuaries  covering  the 
period  from  1863  to  1893.  There  are  three  particular 
features  of  that  experience  which  had  never  before  re- 
ceived so  much  attention  and  care,  namely :  —  the  tracing 
of  the  mortality  (1)  according  to  the  duration  of  the 
policy,  and  (2)  according  to  the  kind  of  policy  taken;  and 
(3)  the  publication  of  full  tables  of  withdrawals.  All  of 
these  are  important  influences,  and  as  regards  the  mor- 
tality in  policy  classes,  it  was  clearly  proved  that  endow- 
ment policies,  and  those  which  call  for  heavy  premiums 


MORTALITY  TABLES  113 

in  proportion  to  the  risk,  were  subject  to  lighter  mortality 
rates  than  whole  life  policies  and  other  forms  where  the 
premium  rate  is  light  as  compared  with  the  risk  incurred. 
The  reason  for  this  is  that  those  who  take  limited  pay- 
ment and  endowment  assurance  policies  are  generally 
well-to-do  people  in  their  own  sphere,  thrifty  and  prudent, 
who  look  to  the  future  and  prefer  a  little  self-sacrifice  now 
if  it  will  provide  greater  comfort  hereafter.  The  prudence 
they  show  in  their  life  assurance  is  an  index  to  their  whole 
mode  of  life,  and  the  discretion  they  exercise  is  rewarded 
by  length  of  days.  The  most  important  tables  are  those 
based  upon  ordinary  whole  life  policies  with  profits,  and 
in  that  class  more  than  550,000  lives  were  included. 
The  effects  of  selection  in  that  class  of  policy  were  also 
carefully  analyzed  for  each  year  during  the  first  ten  years 
of  duration,  and  full  monetary  tables  have  been  published. 
The  following  table  shows  the  classes  of  policies  which 
were  separately  investigated,  and  gives  also  the  number 
of  lives  included  in  the  aggregate  observations : 

Male  Lives:                                          No.  of  Lives.  Years  of  Risk. 

(1)  Whole  Life  Assurances,  With  Profits 551,838  7,056,863 

(2)  Whole  Life  Assurance,  Without  Profits 56,807  602,591 

(3)  Endowment  Assurances,  With  and  Without 

Profits 132,043  897,673 

(4)  Whole  Life,  Limited  Premiums 36,839  410,251 

(5)  Whole  Life,  Ascending  Scale     23,280  207,709 

(6)  Joint  Life  Assurances 9,195  90,171 

Over 

(7)  Contingent  Survivorship  Assurances   3,482  15,500 

Over 

(8)  Temporary  Assurances  11,603  36,000 

Female  Lives: 

(1)  Whole  Life  Assurances,  With  Profits 42,293  507,042 

(2)  Whole  Life  Assurances,  Without  Profits     .  .  11,050  112,010 

(3)  Joint  Life  Assurances 7,222  77,078 

The  Female  Lives  in  the  other  classes  are  so  few  as  to 
be  of  no  value  statistically. 


114  YALE  READINGS  IN  INSURANCE 

The  mortality  amongst  lives  assured  who  take  policies 
with  the  right  to  participate  in  surplus  is  noticeably 
lighter  in  Great  Britain  than  that  amongst  those  who  take 
non-participating  policies.  The  reason  probably  is  that 
non-participating  policies  are  generally  effected  on  the 
lives  of  borrowers  and  for  financial  reasons;  and,  as  already 
stated,  debtors  and  borrowers  are  not  on  the  average  so 
healthy  as  thrifty  people.  There  is  reason  to  believe, 
however,  that  the  same  condition  does  not  hold  in  America. 
It  is  thought  rather  that  the  opposite  effect  is  experi- 
enced, viz.;  that  non-participating  policy-holders  are  subject 
to  lighter  mortality  rates  than  those  who  take  policies 
with  the  right  to  participation.  The  reason  is  that  non- 
participating  policies  in  America  are  taken  with  a  purpose 
in  view  entirely  different  from  that  above  outlined;  in 
many  cases  this  form  is  taken  as  the  result  of  extreme 
conservatism. 

One  very  important  investigation  recently  completed 
was  that  made  by  the  Actuarial  Society  of  America  into 
special  classes  of  assured  lives.  In  all  there  were  98 
separate  classes  of  risks,  covering  a  wide  range  of  ma- 
terial, and  the  particulars  of  about  two  and  one-half 
millions  of  lives  were  furnished  by  the  American  life 
assurance  companies.  The  classes  of  risks  may  be  generally 
described  as  follows: 

(1)  Policies  for  large  amounts:  one  class  over  $20,000. 

(2)  Policies  granted  on  terms  other  than  applied  for  (2 
classes). 

(3)  Nationality:  divided  into  4  classes. 

(4)  Occupation:  divided  into  35  classes  and  covering 
army,   navy,   and   marine   service;   the   more   important 
hazardous  trades;  liquor  dealing;  and  railway  service. 

(5)  Personal  disability:   covering  32   classes,   including 
past  history  of  diseases  such  as  gout,  blood-spitting,  etc., 
unusual  weights  and  unusual  heights. 

(6)  Family   history   unsatisfactory:    covering  2    classes 
dealing  respectively  with  cancer  and  insanity. 


MORTALITY  TABLES  115 

(7)  Place  of  residence:  22  classes,  each  relating  to  a 
different  county  in  the  United  States. 

The  mortality  experience  in  these  different  classes  was 
compared  with  a  table  which  was  adopted  as  representing 
standard  mortality  amongst  healthy  lives,  with  allowance 
for  the  effects  of  medical  selection  during  the  first  five 
years  from  the  date  of  issue.  Great  care  must  be  exer- 
cised in  making  use  of  the  results  of  this  investigation, 
and  discriminating  judgment  is  necessary  because  of  two 
important  considerations  which  an  inexperienced  refer- 
ence to  the  published  tables  might  not  at  first  reveal. 
The  first  and  most  important  is  that  the  lives  assured  in 
these  special  classes  were  all  accepted  by  assurance  com- 
panies; and  presumably,  therefore,  they  represented  the 
very  best  material  from  these  special  classes.  One  promi- 
nent example  may  be  given  by  way  of  illustration,  namely, 
the  class  relating  to  personal  history  where  the  applicant 
"has  had  blood-spitting."  The  rate  of  mortality  shown 
in  that  class  is  only  108  per  cent,  of  the  tabular  rate  adopted 
as  representing  normal  mortality.  This  cannot  be  con- 
sidered as  the  true  mortality  amongst  people  generally 
who  have  suffered  from  blood-spitting;  but  it  does  repre- 
sent the  mortality  which  was  experienced  by  assurance 
companies  on  lives  accepted  who  had  disclosed  this  feature 
in  their  past  history.  It  may  be  taken  as  certainty,  how- 
ever, that  any  person  giving  a  history  of  blood-spitting 
within  a  period  very  shortly  before  the  date  of  taking  a 
policy  would  be  absolutely  rejected;  and  moreover,  even 
in  the  case  of  a  history  of  blood-spitting  some  years  before 
the  date  of  application,  the  case  would  be  declined  unless 
the  physique  of  the  applicant  in  other  respects  were  almost 
perfect.  If  any  applicant  showed  an  under-average 
physique,  and  gave  at  the  same  time  a  history  of  blood- 
spitting,  he  would  almost  to  a  certainty  be  declined  by 
any  assurance  company.  The  statistics  do  not  always 
indicate  the  average  mortality  amongst  persons  coming 
within  any  one  of  the  specialized  classes;  but  only  the 


116  YALE  READINGS  IN  INSURANCE 

mortality  experienced  by  companies  on  lives  accepted  by 
them  —  ignoring  entirely  rejected  lives  of  the  same  class. 
Analogous  remarks  apply  to  many  other  cases;  and,  as 
already  stated,  the  results  must  be  used  with  great  care 
and  discrimination. 

The  second  consideration  is  not  of  so  much  importance 
-  it  is  the  question  as  to  whether  the  standard  table  has 
been  accurately  chosen  as  representing  the  average  mor- 
tality amongst  assured  lives  in  America.  If  the  standard 
show  high  mortality,  then  all  the  results  appear  more 
favorable  than  they  ought;  while  if  the  standard  be  low, 
then  the  opposite  effect  is  obtained. 

One  important  question  in  connection  with  the  mor- 
tality of  life  assurance  companies  is  the  effect  of  what  is 
called  selection.  Before  a  policy  is  issued  on  the  life  of 
any  person  he  has  to  undergo  a  medical  examination  and 
other  restrictive  tests  designed  to  set  aside  all  who  are 
below  a  certain  standard  of  vitality.  The  result  is  that 
persons  who  obtain  policies  of  assurance  are  subject  to 
lower  mortality  rates  than  the  general  population  at  the 
same  age,  and  particularly  is  this  noticeable  in  the  period 
immediately  after  the  policies  are  taken.  At  that  time 
there  are  none  but  healthy  lives;  of  course  even  those  are 
subject  to  accident  and  to  what  might  be  called  accidental 
diseases,  such  as  fevers,  pneumonia,  etc.  By  the  recent 
0(M)  experience  the  death  rate  per  thousand  amongst 
selected  lives  at  age  40  is  less  than  5.  In  the  course  of  a 
year  or  two,  however,  illnesses  of  a  more  permanent  nature 
make  their  appearance  amongst  policy-holders:  heart, 
lung,  and  brain  diseases  affect  the  lives  to  a  greater  or  less 
degree,  and  indeed  the  mortality  gradually  approximates 
to  the  same  rates  as  affect  the  classes  of  persons  from 
amongst  whom  the  selection  had  been  made.  At  the  same 
age  of  40,  amongst  persons  who  have  been  insured  for 
five  or  more  years  (i.e.,  who  effected  policies  at  35  or  a 
younger  age  and  were  40  at  date  of  investigation)  the 
death  rate  is  about  10  per  thousand,  or  more  than 


MORTALITY  TABLES  117 

double  the  rate  applicable  to  selected  lives  of  the  same 
age. 

Another  feature  which  has  received  a  great  deal  of 
attention  as  affecting  the  rate  of  mortality  is  the  right 
always  enjoyed  by  policy-holders  of  withdrawing  and 
lapsing  their  policies,  either  by  taking  a  surrender  value 
in  cash  or  otherwise.  The  opinion  was  formerly  held  quite 
generally  that  the  healthier  policy-holders  discontinued 
their  contracts,  while  those  who  were  unhealthy  and  could 
not  obtain  assurance  protection  elsewhere  continued  their 
policies  year  after  year.  It  was  therefore  thought  that 
the  effect  of  lapses  would  be  to  increase  the  average 
mortality  amongst  those  retaining  their  policies,  as  the 
tendency  would  be  to  lower  the  average  vitality  by  the 
withdrawal  of  an  undue  proportion  of  healthy  lives.  Of 
recent  years  it  has  been  pointed  out  that  policy-holders  who 
discontinued  their  contracts  do  so  more  frequently  because 
of  financial  embarrassment  than  because  they  are  healthy 
and  do  not  require  the  protection.  The  protection  offered 
by  life  assurance  is  more  thoroughly  appreciated  after  it 
is  possessed  than  before;  and  healthy,  prosperous  people 
value  the  benefits  more  than  the  improvident.  It  follows, 
therefore,  that  a  great  many  lapses  take  place  because  the 
policy-holder  has  fallen  into  irregular  habits,  and  it  is 
well  known  that  the  rate  of  mortality  affecting  such  people 
is  much  heavier  than  that  which  applies  in  the  case  of 
thrifty  and  prosperous  men.  Lapses  of  this  nature  tend 
to  improve  the  mortality  amongst  those  remaining,  be- 
cause they  reduce'  the  proportion  which  the  unhealthy 
bear  to  the  total  number. 

As  is  indicated  above,  there  is  an  element  of  discrim- 
ination on  the  part  of  policy-holders  themselves  accord- 
ing to  the  class  of  policy  they  may  take.  Those  who  take 
policies  which  provide  large  assurance  protection  at  small 
rates  are  subject  to  heavier  mortality  than  those  who 
take  policies  of  investment  forms  which  require  larger 
premiums,  although  each  class  is  subjected  to  the  same 


118  YALE  READINGS  IN  INSURANCE 

initial  tests  by  the  assurance  companies.  The  circum- 
stances and  the  basis  of  argument  are  exactly  the  same 
as  those  referred  to  in  the  preceding  paragraph.  Prosper- 
ous and  thrifty  people,  who  are  looking  to  the  future, 
prefer  investment  forms  of  policies  which  provide  not  only 
immediate  protection,  but  at  the  same  time  build  up  a 
capital  for  themselves  in  later  life.  The  man  who  is  strug- 
gling along  from  year  to  year  and  living  close  up  to  his 
income  may  feel  the  necessity  for  assurance  protection 
for  the  benefit  of  his  family  or  of  his  business,  but  he  strives 
to  obtain  this  protection  at  the  cheapest  possible  rate; 
and,  as  already  indicated,  men  of  this  temperament  are 
subject  to  heavier  mortality  rates. 

It  is  sometimes  said  that  if  a  company  were  to  issue 
policies  for  $1000  each,  on  the  life  of  every  person  passing 
along  a  certain  street  on  a  given  day,  without  medical 
examination  or  any  other  test,  and  at  the  ordinary  pre- 
miums for  the  respective  ages,  and  if  the  policies  were  duly 
maintained,  the  result  would  be  a  most  profitable  one  for 
the  company.  This  remark  is  probably  quite  correct; 
but  it  is  not  correct  to  pass  from  this  statement  as  is  fre- 
quently done  and  say  that  the  companies  could  afford  to 
take  all  who  apply  without  selection.  If  any  company 
were  to  do  this,  the  unhealthy  would  apply  for  large 
amounts,  because  it  is  easy  to  convince  an  unhealthy  man 
that  life  assurance  is  desirable;  while  on  the  other  hand 
the  healthiest  would  refuse  to  be  classed  amongst  them, 
and  would  rather  take  the  risk  upon  themselves.  In  like 
manner,  it  would  riot  be  correct  to  accept  every  person 
passing  along  a  certain  street  for  such  amounts  as  they 
might  themselves  choose,  because  in  that  case  the  healthy 
would  take  small  amounts  and  the  unhealthy  large.  The 
average,  therefore,  would  not  be  maintained  because  there 
would  be  a  greater  preponderance  of  business  on  unhealthy 
persons. 

No  single  company  can  ever  afford  to  dispense  with 
careful  selection,  although  it  is  possible  that  at  some  time 


MORTALITY  TABLES  119 

in  the  dim  future,  when  social  science  has  developed  much 
more  fully  than  at  present,  the  companies  may  unani- 
mously agree  (or  legislation  may  require)  that  all  who 
apply  should  be  assured  for  an  amount  determined  accord- 
ing to  the  assessed  value  of  the  life.  Something  in  this 
direction  might  take  place  if  it  were  possible  to  assess  the 
monetary  value  of  a  person's  life  in  a  manner  similar  to 
the  assessing  of  the  value  of  property  for  fire  insurance; 
and  it  is  the  only  direction  in  which  it  would  seem  to 
be  possible  to  conduct  life  assurance  without  medical  exam- 
ination in  its  complete  sense. 

Various  plans  of  life  assurance  without  medical  examina- 
tion have  been  adopted  and  are  more  or  less  popular  in 
Great  Britain,  but  restrictive  measures  other  than  ex- 
aminations are  in  vogue  to  secure  that  the  experience 
under  such  policies  will  be  of  an  average  character.  Men- 
tion may  be  made  of  the  compulsory  assurance  of  employees 
in  the  service  of  large  corporations  where  every  person 
must  be  assured,  the  premium  being  often  payable  wholly 
or  in  part  by  the  employer.  In  such  case,  the  average  is 
maintained  because  the  assurance  is  obligatory  on  all. 
Or  again,  as  the  effects  of  medical  selection  are  supposed 
to  be  of  little  consequence  five  years  after  policies  have  been 
taken  out  (not  that  this  supposition  applies  to  individual 
cases  in  any  way,  but  only  on  the  average),  one  or  two 
companies  offer  policies,  subject  to  participation  in  the 
surplus  of  their  own  class,  and  with  the  proviso  that, 
during  the  first  three  or  five  years,  only  a  portion  of  the 
face  value  would  be  payable  in  event  of  death.  Another 
plan  which  has  been  found  very  successful  is  to  issue  only 
what  is  known  as  a  double  endowment  policy.  Under 
such  a  contract,  if  the  life  assured  were  to  survive  a  fixed 
period,  then  the  amount  payable  at  that  time  as  an  en- 
dowment would  be  double  the  amount  which  would  have 
been  paid  in  event  of  death  during  the  period.  In  this 
case,  also,  such  policy-holders  participate  in  the  surplus 
of  their  own  classes,  and  the  premiums  are  sufficiently 


120  YALE  READINGS  IN  INSURANCE 

large  to  ensure  that  there  will  be  a  good  surplus  for  dis- 
tribution. 

These  plans  are  all  said  to  be  successful,  but  they  could 
not  under  existing  laws  be  practised  throughout  the 
United  States,  because  in  several  states  life  assurance 
companies  are  expressly  forbidden  from  issuing  policies 
unless  a  medical  examination  of  the  life  shall  have  been 
made  by  a  duly  qualified  examiner. 

When  the  rates  of  mortality  have  been  ascertained 
from  the  data  of  assurance  companies  or  from  population 
statistics,  it  is  usually  found  that  they  fluctuate  from  year 
to  year  and  do  not  run  smoothly.  For  example,  in  an 
individual  case  the  rate  of  mortality  at  age  30  might  be 
found  lower  than  at  age  29,  although  other  experiences 
would  indicate  that  the  contrary  should  be  the  case,  while 
at  age  31  again  the  rate  might  be  abnormally  high.  Such 
accidental  irregularities  are  to  be  expected,  more  par- 
ticularly if  the  numbers  under  observation  are  small;  and 
it  is  therefore  necessary,  in  order  to  obtain  a  mortality 
table  of  practical  utility,  to  submit  these  statistics  to  a 
process  known  as  "graduation."  Graduation  aims  at 
removing  irregularities  which  may  be  accidental,  without 
disturbing  what  may  be  peculiar  features  of  the  statistics 
investigated.  The  adjusted  results  should  be  compared 
with  the  ungraduated  figures.  The  tests  of  a  good  adjust- 
ment are  stated  to  be : 

(1)  General  regularity  in  the  mortality  rates; 

(2)  Close  agreement  in  the  total  number  of  deaths  in 
graduated  and  ungraduated  tables;  and 

(3)  The  frequency  in  change  from  positive  to  negative 
deviations,  which  indicate  that  the  original  figures  have 
been  closely  followed. 

The  simplest  methods  of  graduation  consist  merely  in 
smoothing  over  the  irregularities  by  averaging  the  results 
at  two  or  three  ages;  and  the  process  has  been  amplified 
from  this,  through  the  graphic  method,  by  which  the 
mortality  is  represented  by  a  diagram,  to  the  assumption 


MORTALITY  TABLES  121 

of  a  law  of  mortality  which  has  been  found  to  adhere  very 
closely  to  the  facts  in  several  large  investigations,  and 
which  provides  great  facility  for  the  solution  of  complex 
problems.  It  is,  however,  outside  the  scope  of  an  element- 
ary work  to  enter  with  any  minuteness  into  this  subject, 
which  is  one  of  considerable  intricacy. 


CHAPTER  IX 

ASSESSMENT  LIFE   INSURANCE  l 

THE  subject  of  assessment  life  insurance  represents  the 
pathological  side,  if  I  may  so  express  it,  of  life  insurance. 
Instead  of  dwelling  upon  the  physiology  of  life  insurance, 
upon  the  normal  phases  of  it,  I  am  invited  to  discuss  those 
phases  which  are  abnormal  and  which  we  hope  are  now 
passing  away.  In  order  to  do  so,  I  find  it  necessary  to 
make  some  explanation  of  how  it  happened  that  the  disease 
of  assessmentism  set  in. 

It  is  worth  while  for  the  young  men  of  the  new  generation, 
who  scarcely  know  assessmentism  at  all,  except  as  con- 
nected with  another  form  of  insurance,  to  be  made  ac- 
quainted with  that  which  was  well  known  to  their  fathers, 
and  but  scarcely  known  to  their  grandfathers.  When  I 
say  it  was  scarcely  known  to  their  grandfathers,  I  mean 
that  there  was  a  time  when  the  pathological  side  of  life 
insurance,  that  is  insurance  of  a  pathological  nature  of 
this  particular  type  at  least,  did  not  exist,  and  when, 
whatever  other  diseases  life  Insurance  might  have  been 
inflicted  with,  this  particular  disease  known  as  assess- 
mentism was  not  to  be  found.  I  shall  point  out  to  you 
why  assessmentism  in  this  country  became  prevalent; 
because  diseases  or  disorders  in  life  insurance,  quite  as 
physical  disease,  do  not  originate  independently,  but  grow 
out  of  other  pathological  symptoms. 

Now,  the  particular  situation  which  gave  rise  to  assess- 

1  By  Miles  M.  Dawson,  Consulting  Actuary,  New  York  City.  Re- 
printed from  pages  120-127,  Volume  XXVI,  of  the  "Annals  of  the 
American  Academy  of  Political  and  Social  Science." 

122 


ASSESSMENT  LIFE  INSURANCE  123 

ment  life  insurance  and  its  great  growth  in  this  country 
was  the  following:  In  their  early  history  the  regular  life 
insurance  companies  of  the  United  States  addressed  them- 
selves to  furnishing  protection.  To-day  one  will  often 
hear  representatives  of  the  fraternal  societies  distinguishing 
between  insurance  and  protection,  and  claiming  that  their 
organizations  are  for  the  express  purpose  of  furnishing 
protection,  as  distinguished  from  investment;  and  I  think 
it  is  a  matter  of  common  knowledge  that  regular  companies 
doing  a  life  insurance  business  in  the  United  States  at  this 
time  give  a  very  large  part  of  their  attention  to  investment 
insurance,  and  their  agents  scarcely  talk  protection, 
separate  from  investment,  at  all.  This  was  not  the  case 
in  the  early  days.  On  the  contrary,  the  insurance  policy 
was  the  whole  life  policy,  a  policy  with  level  premiums 
payable  so  long  as  the  insured  lived,  the  amount  being 
payable  when  the  insured  died,  and  with  no  other  bene- 
fits. These  policies  had  no  surrender  values  originally, 
although  there  was  every  reason  why  some  surrender 
value  might  have  been  allowed;  but  while  they  had  no 
surrender  values,  the  rates,  being  computed  upon  certain 
conservative  bases,  were  what  we  may  call  redundant, 
and  the  expected  mortality  was  much  greater  than  experi- 
enced. In  consequence,  there  was  a  large  margin  on  these 
premiums  and,  as  most  of  the  companies  were  mutual, 
or,  if  not  mutual,  sold  participating  mutual  policies  which 
promised  the  insured  a  share  in  the  surplus,  it  necessarily 
followed  that  there  were  large  dividends,  so  called,  to  be 
paid  to  the  insured. 

Now,  when  men  are  seeking  for  protection,  there  are 
two  questions  for  them  to  consider,  quality  of  protection 
and  the  price;  and  these  companies,  or  some  of  them  at 
least,  at  the  start  expected  to  earn  dividends  and  to  pay 
them  annually,  equal  to  fully  50  per  cent,  of  the  premiums 
they  were  charging.  In  order  to  convince  the  public 
that  they  would  earn  these  dividends,  and  believing  that 
it  was  a  perfectly  safe  and  prudent  thing  to  do,  they 


124  YALE  READINGS  IN  INSURANCE 

offered  to  permit  a  portion  of  the  premium,  usually  40 
per  cent,  or  50  per  cent.,  to  stand  against  the  policies  as  a 
charge,  bearing  interest;  and  the  expectation  held  out  to 
the  insured  was  that  the  charge  would  be  wiped  out  by 
dividends.  Now  consider  what  this  would  mean.  Take 
it  on  a  50  per  cent,  basis.  It  meant  that  when  a  man  was 
actually  paying  $16  for  $1000  of  insurance,  the  insured 
was  led  to  believe  that  his  insurance  was  worth  only  $8; 
and  that  was  all  he  paid  in  cash  at  the  time.  In  point  of 
fact,  largely  because  men  conducting  companies  did  not 
understand  what  they  were  doing,  the  annual  dividend 
expectations,  in  connection  with  which  these  charges 
against  the  policies  had  been  made,  were  disappointed; 
and  the  insured  found  himself  with  an  increasing  charge 
against  his  policy  which  amounts  to  a  diminution  of  the 
amount  insured,  and  with  an  increasing  rate  to  pay,  in- 
cluding the  interest  upon  the  increasing  charge;  in  other 
words,  with  more  to  pay  and  less  to  get.  This  was  unsatis- 
factory, and  the  plan  became  unpopular;  but  it  left  one 
psychological  result  in  the  minds  of  unthinking  people, 
and  that  was  that  insurance  at  that  age  was  worth  only 
$8.  Moreover,  it  chanced  that  the  death  losses  in  some 
companies  were  only  8,  9,  or  10  per  thousand  for  a  time. 
So  the  policy-holders  declared  they  were  robbed,  mis- 
treated. 

Men  also  learned  at  this  time  that  there  was  a  reserve 
in  life  insurance,  and  that  the  state  required  the  company 
to  hold  a  reserve;  but  they  had  no  idea  concerning  its 
function,  and  they  believed  it  to  be  unnecessary.  They 
said,  these  losses  are  only  8  or  9  out  of  every  thousand; 
there  are  some  variations  from  year  to  year,  but  it  is  evi- 
dent there  is  no  natural  increase.  So  a  company  can  pay 
its  losses  out  of  current  premiums,  can  pay  liberal  expenses, 
and  have  a  large  surplus  left.  There  is,  consequently,  no 
use  for  a  reserve.  That  was  their  reasoning.  The  want 
of  surrender  values,  giving  back  to  the  insured  a  portion 
of  the  reserve  in  case  he  was  compelled  or  desired  to  stop 


ASSESSMENT  LIFE  INSURANCE  125 

his  insurance,  was  one  reason  why  that  psychological  result 
was  to  be  found  in  the  minds  of  the  policy-holders.  So 
we  have  two  things,  the  issue  of  the  fallacious,  misleading, 
annual  dividend,  loan  note  policy,  and  the  refusal  to  give 
surrender  values,  representing  some  part  of  the  reserve. 
These  two  things,  working  together,  produced  in  the  minds 
of  the  people  two  ideas,  one  being  that  there  was  no 
reason  for  holding  the  reserve,  which  was  only  a  means  of 
robbing  the  policy-holders,  and  the  other  that  the  insured 
need  pay  only  about  one-half  the  premiums  they  had  been 
charged  by  the  old-line  companies,  which  was  all  that  was 
required  to  pay  the  losses. 

In  the  year  1868,  after  all  these  conditions  which  I 
have  described  had  long  been  present  and  were  growing 
worse,  there  was  launched  in  the  State  of  Pennsylvania,  in 
the  little  city  of  Meadville,  an  assessment  plan.  That 
was  the  beginning  practically  of  assessment  life  insurance  in 
the  United  States.  It  was  not  really  the  intention  to  make 
this  association  an  insurance  society,  but  something  akin 
to  a  labor  union.  It  was  given  the  name  of  the  Ancient 
Order  of  United  Workmen.  Incidentally,  as  one  will  find 
to  be  the  case  now  in  a  good  many  thriving  unions,  it  was 
proposed  to  give  a  small  protection  to  the  members  of 
the  union  out  of  a  common  fund  to  be  contributed  by  the 
payment  of  $1  by  each  member  whenever  another  died. 
Subsequently,  however,  the  organization  dispensed  with 
the  idea  of  assessing  the  members  until  the  funds  on  hand 
were  wiped  out  by  death  losses.  The  labor  union  part  of 
the  proposition  was  an  utter  failure  from  the  start;  but 
owing  to  the  conditions  I  have  just  mentioned,  the  assess- 
ment life  insurance  feature  became,  after  two  or  three 
years,  extremely  popular.  Similar  institutions  multiplied 
throughout  Pennsylvania,  and  in  a  short  time  throughout 
the  entire  country,  the  ground  having  been  well  prepared 
for  assessmentism,  as  has  been  mentioned. 

I  want  to  call  attention  to  the  fact  that  about  the  time 
that  it  became  popular  there  also  arose  an  extremely 


126  YALE  READINGS  IN  INSURANCE 

favorable  condition  for  it,  viz.,  the  panic  of  1873.  For 
when  the  panic  came  it  caused  the  downfall  of  a  large  num- 
ber of  the  regular  life  insurance  companies.  During  the 
years  1872  to  1880  the  amount  of  insurance  in  force  in 
the  regular  companies  diminished  about  50  per  cent,  by  the 
failure  of  companies  and  on  account  of  hard  times.  It 
was  necessary  for  men  to  find  some  sort  of  life  insurance 
from  month  to  month  as  it  were  and  at  level  cost,  and 
according  to  what  an  extremely  happy  phrasemaker  re- 
cently named  it,  the  most  "comfortable"  method  of  pay- 
ment, namely,  by  monthly  payments.  About  the  same 
time  the  tontine,  or  deferred  dividend,  plan  became  a 
feature  of  life  insurance.  It  provided  that  all  money  paid 
in  by  the  insured  should  be  pooled  for  ten,  fifteen,  or  twenty 
years.  We  have  practically  an  abandonment  of  the  pure 
insurance  field  by  the  regular  companies  at  this  time,  or 
at  least  by  the  most  enterprising  and  progressive  of  the 
regular  companies.  They  began  to  address  themselves  to 
those  persons  who,  observing  the  enormous  number  of 
lapses  and  discontinuances  which  took  place  during  the 
panic  times,  and  the  hard  times  that  followed,  were  con- 
vinced that  they  could  make  a  good  speculation  out  of 
what  agents  called  their  "financial  strength,"  i.e.,  their 
ability  to  keep  their  policies  in  force;  and  as  the  hard 
times  caused  people  to  want  cheap  insurance,  protection 
policies  as  distinguished  from  investment  policies,  con- 
ditions became  extremely  favorable  for  the  introduction 
of  assessment  insurance  in  the  United  States. 

It  may  be  well  to  say  a  little  more,  by  way  of  introduc- 
tion, as  to  what  assessmentism  was,  what  it  did,  and  how 
it  came  to  be ;  and  to  state  that  if  such  a  plan  had  not  been 
introduced  at  just  this  time  by  the  Ancient  Order  of  United 
Workmen,  it  might  never  have  been  known  in  the  United 
States.  The  idea  was  conceived  by  Father  Upchurch, 
who  had  learned  of  the  friendly  societies  of  Great  Britain 
and  knew  that  insurance  on  the  assessment  plan  had  been 
furnished  by  these  societies.  Another  thing  that  he  would 


ASSESSMENT  LIFE  INSURANCE  127 

have  known,  had  he  been  a  deeper  student,  was  that  the 
plan  had  been  an  utter  failure  in  Great  Britain,  and  that 
the  friendly  societies  were  reforming  their  methods  and 
abandoning  systems  such  as  he  introduced,  adopting  more 
scientific  modes  of  doing  business.  Traces  of  something 
like  assessment  life  insurance  societies  are  to  be  found  far 
back  in  history,  in  the  ancient  guilds  of  Rome  and  Greece, 
of  Germany  and  Great  Britain,  but  the  sums  to  be  paid 
were  usually  small  funeral  benefits  or  benefits  for  the  last 
illness.  Now  suppose  the  members  were  charged  10  cents 
a  month  to  furnish  a  benefit  of  $50  upon  the  death  of  one 
of  them,  it  would  be  a  high  price,  but  it  is  evident  that 
the  members  would  not  be  likely  to  try  to  ascertain  whether 
they  should  have  paid  12  or  8  cents,  for  the  simple  reason 
that  the  contributions  were  small  and  the  benefits  were 
small.  We  find,  however,  that  when  a  large  portion  of 
the  membership  found  that  there  was  discrimination  and 
the  amounts  were  larger  a  totally  different  case  presented 
itself. 

Somewhere  about  the  close  of  the  seventeenth  century, 
the  year  1706,  I  think,  there  was  chartered  by  a  special 
act  of  the  British  parliament  a  society  known  as  the  Ami- 
cable Corporation,  for  the  purpose  of  furnishing  insurance 
upon  the  lives  of  its  members.  Its  system  was  as  follows: 
Every  member  made  a  contribution,  without  regard  to 
age,  each  year.  At  the  end  of  the  year  the  funds  that  were 
on  hand  were  divided  equally  among  the  claimants  of  the 
persons  who  had  died  during  the  year,  and  also  without 
regard  to  age.  About  a  quarter  of  a  century  later  there 
was  organized  a  regular  life  insurance  company,  which 
furnished  policies  for  only  one  year,  or  five  or  seven  years, 
and  at  a  high  price;  so  that  the  Amicable  Society  for  a 
half  century  or  more  had  a  monopoly  of  what  we  now  call 
whole-life  insurance.  Notwithstanding  this  monopoly,  it 
became  necessary  for  the  society  to  make  different  pro- 
visions concerning  the  distribution  of  its  funds  and  also 
concerning  the  collection  of  funds. 


128  YALE  READINGS  IN  INSURANCE 

In  1762,  as  a  result  of  lectures  in  London  by  a  former 
professor  of  mathematics  in  Cambridge,  Mr.  Dodson,  and 
by  a  man  whom  the  Encyclopedia  Britannica  calls  the 
ablest  non-academic  mathematician  Great  Britain  ever 
produced,  Mr.  Thomas  Simpson,  a  society  called  the  Equit- 
able Society  was  founded.  It  was  refused  a  charter  by 
the  British  Parliament  on  the  ground  that  the  plan  it 
proposed  to  give  its  members  was  a  new  idea,  untried, 
dangerous,  and  difficult  to  understand,  and  that  if  such 
a  thing  was  attempted  at  all  the  company  should  be  com- 
pelled to  raise  a  very  large  capital,  all  of  which  seems 
amusing  at  this  time,  for  the  system  proposed  was  the 
level  premium  plan.  This  society,  the  Equitable  of  Lon- 
don, was  the  first  regular  life  insurance  company  in  the 
world  to  do  a  whole  life,  level  premium  business.  It  is 
in  existence  to-day  with  more  than  twenty-five  millions  of 
assets  and  about  forty  millions  of  insurance  in  force. 

After  the  organization  of  the  Equitable,  there  continued 
to  be  assessment  plans  in  Great  Britain,  and  some  societies 
of  the  "$1  a  month"  or  "$1  every  time  a  member  died" 
sort,  grew  to  great  size,  and  then  failed  or  changed  their 
plans.  All  this  was  before  the  time  of  Father  Upchurch 
and  might  have  been  known  by  him. 

As  a  result  of  the  introduction  of  the  plan  in  this  country, 
and  the  favorable  conditions  for  its  spread,  there  came  to 
be  numerous  societies  on  the  assessment  basis.  Please 
bear  in  mind  that  the  plan  introduced  by  Father  Upchurch 
was  to  collect  just  enough  money  to  pay  the  claim  by  levy- 
ing a  certain  sum  on  all  members  without  regard  to  age. 
There  sprang  up  numerous  small  associations,  some  of 
which  grew  to  large  proportions.  The  Ancient  Order  of 
United  Workmen  now  has  more  than  400,000  members 
and  over  $700,000,000  of  insurance. 

In  addition  to  the  above-named  societies,  there  are 
others  known  as  business  assessment  associations,  where 
the  management  is  vested  in  persons  who  have  the  power 
of  perpetuating  their  control  by  means  of  proxies  from 


ASSESSMENT  LIFE  INSURANCE  129 

the  members.  These  societies  claimed  to  be  superior  to 
fraternal  societies,  because  of  the  business  men's  services 
that  they  were  able  to  secure  and  utilize,  and  their  superior 
attention  to  the  details  in  the  conduct  of  the  business. 
Some  of  these  became  large  institutions,  and  ten  or  fifteen 
years  after  their  first  appearance  a  very  large  portion  of 
the  life  insurance  of  the  country  was  in  "business  assess- 
ment" societies. 

They  did  not,  however,  proceed  very  far  on  the  equal 
levy,  or  flat  assessment,  system.  They  felt  it  was  not  only 
unfair  to  put  a  man  of  60  and  a  youth  of  20  in  the  same 
class  and  to  charge  the  same  rate  of  premium  for  both, 
but  that  it  also  resulted  in  the  young  man  aged  20  or  30 
not  going  in  or  not  remaining  in,  on  account  of  the  exces- 
sive cost,  while  the  old  man  persisted.  In  the  State  of 
Pennsylvania  at  this  time,  for  example,  there  were  myriads 
of  these  societies.  No  other  part  of  the  country  was  so 
pestered  with  them  as  Pennsylvania.  Many  were  called 
" graveyard"  associations  because  they  allowed  specula- 
tion on  the  lives  of  old  men  in  feeble  health  by  persons 
who  had  no  interest  in  their  lives  whatever.  These  con- 
cerns were  short  lived,  of  course. 

They  did  not,  however,  proceed  very  far  on  the  equal 
levy,  or  flat  assessment  plan  of  life  insurance,  which  was 
so  unfair  and  dangerous  on  account  of  no  regard  being  paid 
to  the  ages  of  the  members  upon  entering.  Most  of  the 
business  societies  were  organized  on  the  basis  of  charging 
a  different  levy  or  assessment  according  to  the  age  of  the 
member  at  his  introduction  into  the  society.  That  is  to 
say,  for  instance,  charging  a  member  introduced  at  the 
age  of  20,  40  cents,  one  introduced  at  the  age  of  40,  60 
cents,  one  introduced  at  the  age  of  50,  $1,  or  whatever  the 
case  may  be.  Frequently  these  rates  were  based  on  a  mis- 
apprehension of  the  mortality  table.  At  the  age  of  20, 
men  die  at  an  average  say  of  7  per  1000;  at  the  age  of  40, 
10  per  1000;  at  the  age  of  50,  15  per  1000,  and  at  the  age 
of  60,  30  per  1000.  Therefore,  said  they,  the  monthly  rate 


130  YALE  READINGS  IN  INSURANCE 

for  the  man  at  20  will  be  one-twelfth  of  $7,  or  60  cents; 
at  40  it  will  be  90  cents,  and  at  50  it  will  be  $1.25,  and  at 
60,  $2.50.  This  they  called  equitable  distribution  of  cost 
and  thought  it  met  all  requirements,  forgetting  that  it 
was  good  for  but  one  year.  Almost  all  of  these  so-called 
business  assessment  life  insurance  societies  were  organized 
on  that  plan. 

Later  in  the  development  of  the  business  there  were 
two  modifications  of  the  plan,  one  consisting  of  the  crea- 
tion of  a  reserve  by  adding  a  percentage  to  the  assessment, 
which  reserve  was  to  be  called  upon  to  help  out  the  excess 
cost  over  what  the  net  assessment  would  provide.  A 
second  method  of  making  reserves  was  invented  by  one  of 
the  most  ingenious  minds  that  has  been  engaged  in  life 
insurance.  According  to  this  method  it  was  proposed  to 
utilize  the  gains  from  lapses,  that  is  to  say,  over-payments 
by  members  who  did  not  keep  up  their  policies,  to  reduce 
the  premiums  for  all  members.  It  was  designed  that 
under  this  system  both  the  premiums  and  reserves  of  the 
persistent  members  would  be  lower  than  under  the  usual 
plan  which  does  not  count  the  gains  from  lapses.  In- 
vestigations since  that  time  have  shown  that  if  these  gains 
are  discounted  and  applied  to  reduce  the  premiums  the 
reserves  will  not  be  reduced;  while  only  in  case  the  pre- 
miums are  not  reduced  will  the  reserve  be  reduced.  Only 
one  company  made  extended  use  of  this  plan.  That  com- 
pany was  able  later  to  reorganize  as  a  regular  life  company, 
and  is  now  conducting  a  prosperous  business  as  such. 

For  the  most  part,  the  business  assessment  societies 
have  passed  out  of  existence.  In  any  event,  they  occupy 
relatively  a  much  less  important  place  than  hitherto. 
The  proportion  of  the  total  life  insurance  in  the  country, 
held  in  the  business  assessment  associations,  has  steadily 
decreased,  and  for  many  years  the  amount  in  force  has 
diminished.  A  considerable  number  of  smaller  societies 
are  still  held  together  by  special  influences,  and  in  a  few 
cases  great  economy  and  skill  in  management,  resulting 


ASSESSMENT  LIFE  INSURANCE  131 

in  low  expenses  and  low  mortality,  has  enabled  the  com- 
panies to  thrive  even  to  this  day,  notwithstanding  the 
defects  of  their  plans.  Many  of  those  which  have  gone 
out  of  business  have  failed,  but  a  respectable  number  were 
reorganized  as  regular  companies,  dealing  with  their  assess- 
ment business  in  various  ways,  which  I  shall  not  here 
attempt  to  discuss. 


CHAPTER  X 

FRATERNAL  LIFE  INSURANCE1 

MORE  than  seven  millions  of  American  citizens  are  to- 
day looking  to  fraternal  societies  like  the  Knights  of  Honor, 
the  Ancient  Order  of  United  Workmen,  the  Independent 
Order  of  Foresters,  and  others  whose  name  is  legion,  for 
protection  to  their  families  in  case  of  death.  The  dis- 
tinguishing feature  of  these  societies  is  that  they  are  asso- 
ciations whose  members  are  banded  together  through  a 
spirit  of  charity  or  fraternity  for  mutual  assistance  and 
protection.  They  are  wholly  outside  the  line  of  our  ordi- 
nary life  insurance  companies,  which  deal  in  insurance  for 
the  general  public  on  a  business  basis.  Their  membership 
is  chiefly  made  up  from  those  of  limited  means  who  are 
seeking  insurance  at  the  smallest  outlay.  Over  one-fourth 
of  the  population  of  this  country  may  be  said  to  be  directly 
or  indirectly  interested  in  these  societies.  A  knowledge 
of  their  principles  and  of  the  character  of  the  insurance 
which  they  offer  is  a  matter  which  concerns  every  American 
citizen  regardless  of  his  interest  in  insurance  as  a  profession. 

Nearly  all  our  existing  fraternal  societies  have  started 
within  the  past  thirty  or  forty  years,  but  they  have  a  long 
line  of  predecessors  extending  back  through  centuries. 
Their  proper  understanding  requires  a  glance  at  their 
historic  relations.  To  the  student  of  sociology  as  well  as 
of  economics  a  peculiar  interest  attaches  both  to  their 
origin  and  history.  As  a  race  we  are  communal  as  well  as 

1  By  Walter  S.  Nichols,  Editor  of  the  Insurance  Monitor,  New 
York.  Reprinted  with  additions  from  pages  162-183  of  the  "Yale 
Insurance  Lectures,  Life." 

132 


FRATERNAL  LIFE  INSURANCE  133 

social  in  our  very  instincts,  and  in  those  instincts  are  the 
fundamental  impulses  that  have  developed  all  our  political 
and  social  organizations.  To  the  evolutionist  they  are 
the  inherited  traits  of  a  remote  ancestry  which  man  shares 
with  lower  forms  of  life.  We  find  the  social  organism  in 
its  simplest  type  in  the  ruminants,  which  herd  together 
for  mere  association  or  protection.  We  find  its  fuller 
developments  in  the  more  strictly  communal  animals  and 
insects.  The  beaver  lodges  join  their  forces  to  build  the 
common  dam  for  the  benefit  of  all,  but  when  the  dam  is 
built  each  separate  lodge  confines  its  attention  to  its  own 
affairs.  In  the  ants  and  bees  we  find  this  communal 
instinct  in  its  extreme  development.  The  female  bee  sur- 
renders her  maternal  functions  to  a  single  queen  and  be- 
comes a  mere  worker,  to  build  and  provision  the  common 
hive  and  care  for  the  offspring.  The  ant  marshals  its  war- 
riors to  guard  the  common  nest  or  to  enslave  its  neighbors. 
Thus  do  we  find  the  germs  of  those  social  and  political 
organizations  which  characterize  our  twentieth  century 
civilization  implanted  in  the  lower  orders  of  creation. 

It  may  seem  a  far-away  thought  from  the  habits  of  the 
insect  and  mammalian  world  to  the  subject  of  the  present 
lecture.  But  there  is  a  deep  significance  in  the  fact  that 
the  fundamental  principles  which  underlie  fraternal  in- 
surance are  thus  operative  in  the  lower  orders  of  life.  The 
fraternal  society  must  be  studied  not  as  the  mere  artificial 
product  of  an  advanced  civilization,  but  as  an  organization 
whose  roots  and  tendrils  are  implanted  deep  down  in 
our  common  humanity.  Civilized  communities  have  no 
monopoly  in  this  spirit  of  fraternalism.  It  was  the  active 
force  at  work  in  primitive  days  when  the  family  relation- 
ship grew  into  the  patriarchal  form  of  government  and  this 
in  turn  expanded  into  the  tribal  state.  As  tribes  solidified 
into  nations  this  social  evolution  moved  along  lines  so 
familiar  in  the  physical  world.  The  homogeneous  pur- 
suits of  the  tribesman  became  the  heterogeneous  occupa- 
tions of  the  civilized  state.  Each  occupation  had  its 


134  YALE  READINGS  IN  INSURANCE 

separate  corps  of  workers,  who  banded  together  in  a  so- 
ciety for  their  common  interest  and  protection  in  the  eco- 
nomic struggle  which  followed  the  barter  and  trade  between 
the  groups.  Thus  was  evolved  the  early  benevolent  or 
fraternal  societies  that  are  met  with  in  so  many  of  the 
nations  of  antiquity. 

We  find  them  in  the  ancient  Roman  empire  as  numerous 
and  influential  as  now.  Rome  had  her  trade  unions,  and 
her  religious  confraternities  devoted  to  the  service  of  her 
gods,  and  her  social  clubs,  and  was  compelled  to  legislate 
for  their  regulation.  Contribution  to  a  common  fund  for 
the  assistance  or  burial  of  their  needy  members  was  then 
as  now  a  familiar  feature.  The  downfall  of  Rome  scarcely 
interrupts  the  story.  Phenix-like,  they  arose  out  of  the 
ashes  of  her  empire  when  her  distant  provinces  developed 
into  the  industrial  states  of  modern  Europe.  In  Great 
Britain,  to  which  our  own  fraternal  societies  directly 
trace  their  origin,  they  were  known  as  guilds,  and  during 
medieval  times  when  agricultural  serfdom  was  being 
broken  up  and  when  centers  of  trade  and  manufacture 
were  developing,  these  trade  societies  wielded  a  strong 
political  influence.  Along  with  them  too  were  religious 
fraternities,  which  were  the  foundation  of  some  of  Eng- 
land's most  important  schools  of  learning.  Aid  to  their 
needy  members  in  ways  more  or  less  crude  was  a  common 
feature  of  these  associations. 

As  the  power  and  influence  of  the  guilds  declined  they 
were  succeeded  by  the  modern  British  friendly  societies, 
from  which  our  own  have  been  so  largely  patterned.  Mem- 
bers chiefly  from  the  working  classes  united  for  mutual  aid 
in  sickness  and  for  funeral  benefits,  through  contributions 
to  a  common  fund.  They  recognized  the  distinctly  in- 
surance character  of  their  work  and  sought  to  frame  scales 
of  moneyed  contributions  which  would  be  adequate.  But 
they  knew  little  of  the  principles  of  insurance,  and  their 
frequent  and  disastrous  failures  at  last  attracted  the  atten- 
tion of  the  British  Parliament.  Investigations  by  that 


FRATERNAL  LIFE  INSURANCE     135 

body,  aided  by  leading  British  actuaries,  disclosed  the  total 
inadequacy  of  their  rates  and  the  mismanagement  which 
characterized  their  affairs.  Attempted  legal  reforms  were 
strongly  resisted  for  a  while  by  the  members,  and  it  has 
required  nearly  a  century  of  legislation  to  place  the  friendly 
society  system  of  Great  Britain  on  the  comparatively 
sound  basis  where  it  now  rests.  Under  the  existing  laws 
in  that  country,  such  societies  are  induced  to  register  and 
to  accumulate  reserve  funds  and  charge  rates  which,  like 
those  of  ordinary  life  companies,  will  be  adequate  to  meet 
their  future  obligations.  When  registered  they  are  re- 
quired to  have  expert  valuations  periodically  made  of  their 
resources  and  liabilities  and  proper  balance  sheets  published 
of  their  affairs.  The  knowledge  of  their  condition  thus 
furnished  to  their  members  and  to  the  public  is  relied  on 
to  check  mismanagement.  The  law  makes  no  attempt  at 
further  interference. 

The  strength  of  the  system  in  that  country  lies  in  the 
fraternal  ties  which  bind  the  members  to  their  societies. 
It  was  this  which  enabled  reforms  to  be  successfully  intro- 
duced into  many  of  them  which,  according  to  any  com- 
mercial standard,  were  already  bankrupt.  The  strength  of 
the  system  in  any  country  must  depend  on  the  fraternal 
character  of  the  society  in  fact  as  well  as  in  name.  The 
chief  weakness  of  the  system  lies  in  the  temptation  to 
divorce  its  twofold  functions  of  benevolence  and  insurance, 
to  regard  the  society  either  as  a  mere  insurance  organiza- 
tion for  business  purposes,  or  else  as  a  brotherhood  whose 
ties  are  strong  enough  to  outweigh  any  defects  in  its  insur- 
ance methods.  When  the  fraternal  spirit  among  the  mem- 
bers is  wanting,  its  work,  to  be  a  success,  must  be  carried 
on  along  the  business  lines  which  characterize  the  ordinary 
insurance  office.  Such  a  change  has  actually  taken  place 
on  a  magnificent  scale  in  the  more  recent  development  of 
these  societies.  It  was  from  the  fraternal  society  both 
here  and  in  Great  Britain  that  industrial  insurance  was 
evolved.  It  was  just  fifty  years  ago  that  the  managers 


136  YALE  READINGS  IN  INSURANCE 

of  such  a  society  in  London  conceived  a  plan  for  abandon^ 
ing  its  fraternal  features  and  furnishing  insurance  to  thw 
poor  on  a  strictly  business  basis.  This  was  the  origin  of 
the  famous  British  Prudential  Insurance  Company,  whose 
policies  are  now  found  in  the  home  of  almost  every  work- 
ingman  in  that  country.  Such  was  the  origin  too  some 
twenty  years  later  of  the  Prudential  Insurance  Company 
of  America,  which  started  as  a  friendly  society  in  New 
Jersey  and  whose  policies  along  with  those  of  its  later  com- 
petitors are  to  be  found  in  millions  of  American  homes. 

The  experience  of  Great  Britain  is  being  repeated  in 
America.  A  similar  insufficiency  in  the  rates  and  ignorance 
of  sound  insurance  principles  have  resulted  in  numerous 
failures  and  now  threaten  the  solvency  of  many  of  our 
American  societies.  Similar  efforts  are  now  being  earnestly 
made  both  by  the  more  intelligent  of  the  members  and  by 
state  authorities  to  place  fraternal  insurance  on  a  sounder 
basis. 

With  this  preliminary  historic  review,  I  enter  at  once  on 
the  discussion  of  the  more  technical  features  of  fraternal 
insurance.  First  let  us  examine  the  structure  and  legal 
character  of  these  associations.  They  generally  consist 
of  one  parent  society  with  its  constitution  and  by-laws  and 
having  numerous  subordinate  local  branch  societies  termed 
lodges.  These  local  societies  are  created  by  the  parent, 
from  which  they  receive  their  charters  or  right  to  exist. 
They  are  governed  by  its  constitution  and  the  laws  which 
it  lays  down.  In  all  questions  of  dispute  the  parent  so- 
ciety has  final  jurisdiction.  In  a  word,  the  local  lodge, 
while  it  has  separate  existence  as  a  society  itself,  and  may 
within  the  limits  allowed  regulate  its  own  affairs,  remains 
subject  to  the  parent  society  of  which  it  is  a  part.  This 
parent  society  is  known  as  the  grand  lodge  and  is  made 
up  of  representatives  chosen  by  the  local  lodges.  Some- 
times a  further  subdivision  is  made  and  the  parent  society 
or  supreme  lodge  is  made  up  of  representatives  from  a 
number  of  grand  lodges  each  with  its  local  lodges. 


FRATERNAL  LIFE  INSURANCE  137 

The  membership  of  the  society  as  a  whole  is  thus  made 
up  of  the  members  of  these  various  local  lodges.  The 
government  is  purely  democratic.  Every  member  is  en- 
titled to  a  vote  in  his  own  local  society  and  thus  has  a  voice 
in  the  selection  of  the  rulers  and  in  making  the  laws  for 
the  whole.  Initiatory  rites  and  ceremonials  are  a  common 
feature.  Unlike  the  British  societies,  in  which  sick  relief 
is  a  prominent  feature,  most  of  our  American  associations 
confine  their  insurance  work  to  the  payment  of  death  and 
disability  benefits.  The  funds  required  for  this  purpose 
are  collected  in  the  form  of  assessments  by  the  local  lodges 
and  turned  over  to  the  officers  of  the  parent  society,  by 
whom  the  insurance  business  of  the  whole  is  managed. 
Sick  benefits  when  allowed  are  usually  paid  by  the  local 
lodges  to  their  members  out  of  their  own  separate  funds. 
Expenses  are  generally  met  by  dues  and  initiation  fees. 
These  local  lodges  thus  act  both  as  separate  societies  in 
the  management  of  their  own  affairs  and  as  agents  of  the 
parent  society  in  collecting  the  common  insurance  funds 
and  in  securing  the  membership. 

It  will  thus  be  seen  that  in  their  constitutions  these  so- 
cieties resemble  in  many  ways  the  ordinary  social  club 
and  for  certain  purposes  the  law  so  regards  them.  The 
active  fraternal  or  benevolent  features  of  the  society  apart 
from  its  insurance  work  are  chiefly  confined  to  the  local 
societies,  where  the  individual  members  meet  for  business 
and  social  purposes  and  where  the  spirit  of  fraternity  is 
fostered.  They  resemble  too  in  certain  respects  some  of 
our  church  organizations,  with  which  the  law  frequently 
compares  them.  We  have  our  individual  church  societies 
with  their  social  and  benevolent  activities  governed  by 
representative  bodies  from  the  various  churches  and  the 
whole  united  under  one  denominational  form  of  govern- 
ment. These  correspond  to  the  local  and  grand  lodges. 

These  societies  are  sometimes  organized  under  corporate 
charters  granted  by  the  state,  sometimes  like  the  ordinary 
club  they  are  mere  voluntary  associations.  Most  of  our 


138  YALE  READINGS  IN  INSURANCE 

states  now  have  general  laws  prescribing  how  these  societies 
may  be  formed  and  carried  on.  When  so  formed  the  law 
itself  becomes  their  constitution.  Sometimes  the  parent 
society  is  thus  incorporated  while  the  inferior  lodges  re- 
main voluntary  associations.  Sometimes  it  is  the  reverse. 
But  in  all  laws  regarding  their  formation  their  character 
as  benevolent  societies  is  insisted  on.  They  are  not  al- 
lowed like  ordinary  companies  to  carry  on  insurance  busi- 
ness for  profit,  and  its  benefits  are  usually  limited  to  the 
relatives  or  dependents  of  the  members.  There  are  some 
important  legal  distinctions  between  those  societies  which 
are  incorporated  and  those  which  are  not,  especially  as  to 
property  rights,  upon  which  I  have  not  the  time  to  enter. 
The  courts  endeavor  in  either  case  so  far  as  the  law  allows 
to  enforce  the  rules  which  they  have  made  for  themselves, 
if  they  are  fair  and  reasonable.  Nearly  all  these  societies 
have  their  own  judicatories  for  determining  the  standing 
and  rights  of  their  members,  by  whose  decision  the  mem- 
bers must  abide.  These  the  courts  will  refuse  to  interfere 
with  so  long  as  they  act  honestly  and  fairly  within  their 
legitimate  province.  They  are  mutual  societies  in  which, 
like  churches,  the  members  are  expected  to  abide  by  the 
form  of  government  to  which  they  have  subscribed.  A 
local  lodge  may  be  cut  off  from  affiliation  with  the  parent 
society  or  may  cut  itself  loose  just  as  a  church  may  cut 
loose  from  its  denominational  connection.  In  neither  case 
is  the  society  itself  dissolved.  It  simply  loses  the  rights 
which  belonged  to  it  as  a  member  of  the  parent  society 
and  must  surrender  whatever  is  in  its  possession  belonging 
to  the  parent.  If  it  has  a  charter  from  the  state,  the  state 
laws  governing  it  as  a  corporation  are  superior  to  any  rules 
of  the  association  itself. 

On  one  point,  however,  whether  incorporated  or  not, 
the  courts  are  insistent,  that  is,  no  rule  or  action  of  the 
society  can  deprive  a  local  lodge  or  a  member  of  insurance 
or  other  property  interests  which  are  already  vested,  that 
is,  in  which  an  unconditional  ownership  has  been  estab- 


FRATERNAL  LIFE  INSURANCE  139 

lished.  Where  they  are  incorporated,  like  other  corpora- 
tions they  are  regarded  by  the  law  as  artificial  persons 
acting  through  their  officers  as  their  agents  and  with  no 
personal  liability  on  the  part  of  the  members  except  those 
imposed  by  the  rules  of  the  society  itself.  Where  they  are 
not  incorporated  their  legal  character  is  not  so  easy  to 
define.  They  are  often  regarded  as  a  peculiar  kind  of 
partnership  qualified  by  the  special  purposes  for  which 
they  were  organized. 

It  will  be  seen  from  this  brief  sketch  that  these  societies 
in  their  constitution  and  structure  are  strongly  analogous 
to  the  ordinary  social  club  or  religious  society,  and  bear  all 
the  earmarks  of  their  historic  origin. 

But  they  also  have  another  aspect  in  the  eyes  of  the  law. 
In  respect  to  their  insurance  features  they  are  regarded  as 
business  associations  furnishing  a  peculiar  type  of  insur- 
ance under  contracts  or  agreements  which  are  governed 
by  the  ordinary  principles  of  the  law  of  contracts.  This 
leads  us  at  once  to  the  insurance  features  of  these  societies. 
As  insurance  associations  they  are  treated  as  mutual  com- 
panies regulated,  of  course,  by  their  charter  and  by-laws, 
with  which  every  member  is  assumed  to  be  familiar.  An 
application,  much  like  that  of  the  ordinary  company,  set- 
ting forth  the  age  and  health  and  other  details  regarding 
his  desired  insurance,  is  usually  required  of  the  applicant 
for  membership.  Instead  of  the  ordinary  policy  he  usually 
receives  what  is  called  a  certificate  of  membership,  reciting 
that  he  is  a  member  of  the  society  and  entitled  to  its  privi- 
leges, and  to  share  up  to  a  specified  amount  in  its  bene- 
ficiary fund,  subject,  however,  to  the  laws  and  rules  of  the 
order,  and  conditioned  on  his  compliance  with  them.  This 
certificate  in  connection  with  the  laws  of  the  society  is 
his  insurance  contract.  It  will  be  noted  that  unlike  the 
ordinary  insurance  policy,  which  is  a  mere  business  agree- 
ment between  the  company  and  the  purchaser  for  a  specified 
consideration,  these  certificates  are  simply  a  recognition 
of  the  rights  of  the  member  which  flow  through  his  mem- 


140  YALE  READINGS  IN  INSURANCE 

bership,  to  share  in  the  benevolent  fund.  Unlike  the  ordi- 
nary policy  which  becomes  the  property  of  the  beneficiary 
named  in  it,  no  matter  who  secured  it  or  paid  the  premium, 
these  certificates  remain  the  property  of  the  member,  who 
can  usually  change  the  beneficiary  at  will. 

The  conditions  on  which  those  rights  are  to  be  enjoyed 
are  not,  as  in  the  case  of  the  policy,  set  out  in  the  certifi- 
cate itself,  but  are  to  be  found  in  the  rules  of  the  society. 
Thus  the  mutual  and  fraternal  idea  of  this  insurance  is 
adhered  to.  More  than  this,  it  is  not  allowed  under  the 
laws  of  most  of  the  states  to  be  a  cold  business  agreement 
for  the  payment  of  a  fixed  sum  of  money  for  a  definite 
premium.  Either  the  amount  must  be  capable  of  modi- 
fication and  adjustment  according  to  the  actual  ability 
of  the  society  to  pay,  or  it  must  reserve  the  right  to  assess 
its  members  for  enough  to  make  up  the  required  benefit. 
The  societies  are  thus  relieved  from  the  obligation  imposed 
on  ordinary  life  companies  to  create  and  maintain  a  reserve 
fund  which  will  be  mathematically  sufficient  to  pay  their 
insurance  obligations.  In  theory  they  can  never  become 
insolvent  because  never  obliged  to  pay  more  than  they  are 
able  or  more  than  that  they  can  collect  from  their  members. 
As  a  matter  of  fact,  they  have  failed  disastrously  at  times 
because  they  had  neither  the  requisite  fund  nor  could 
collect  the  needed  assessments. 

Until  very  recent  years  it  has  been  the  almost  universal 
practice  to  limit  the  actual  funds  of  the  society  to  the  small- 
est amount  which  was  deemed  necessary  to  meet  special 
emergencies.  The  constant  inflow  of  new  members,  it  was 
argued,  would  prevent  serious  deficiencies,  and  the  frater- 
nal spirit  of  the  members  would  do  the  rest.  The  prime 
object  aimed  at  was  to  give  the  insurance  at  the  least 
possible  outlay  to  the  members  in  a  work  which  was  as- 
sumed to  be  benevolent  in  its  character  and  not  conducted 
for  profit.  The  fallacy  of  these  views  is  now  being  gen- 
erally recognized,  as  we  shall  shortly  see. 

The  payments  made  by  the  members  are  not,  as  in 


FRATERNAL  LIFE  INSURANCE  141 

ordinary  life  insurance,  premiums  paid  for  the  purchase 
of  a  pure  business  contract,  but  are  generally  of  two  kinds, 
initiation  fees  and  dues,  used  as  in  ordinary  clubs  for  the 
expenses  of  the  society,  and  assessments  levied  on  its  mem- 
bers as  contributions  to  its  insurance  fund,  and  are  pro- 
vided for  in  the  rules  of  the  society  itself. 

In  the  earlier  days  of  the  societies  these  assessments  were 
generally  alike  in  amount  regardless  of  age  and  were  col- 
lected only  on  the  death  of  a  member  for  the  payment  of 
his  benefit,  thus,  as  you  observe,  carrying  out  still  further 
the  idea  of  fraternity.  But  as  the  societies  grew  older  the 
fallacies  of  this  method  were  taught  the  members  by  a 
hard  experience.  By  simply  dropping  his  insurance  which 
he  had  already  enjoyed  a  member  could  escape  paying  his 
share  of  the  death  losses.  As  the  members  grew  older 
and  the  death  losses  increased,  those  that  were  younger 
were  not  long  in  discovering  that  they  were  contributing 
more  than  their  share  to  the  death  losses,  which  were 
chiefly  among  the  old.  As  a  result  these  dropped  their 
membership  and  joined  younger  societies.  New  recruits 
to  fill  their  places  could  not  be  obtained.  The  average 
age  of  those  that  were  left  continued  to  increase  and  the 
assessments  to  grow  heavier.  This  in  turn  increased  the 
withdrawals,  until  at  last  few  remained  except  the  sick  and 
aged.  Assessments  for  losses  could  no  longer  be  collected, 
and  the  society  would  dissolve,  leaving  a  body  of  old  and 
infirm  deprived  of  the  benefits  for  which  they  had  so  long 
contributed.  This  has  been  the  story  of  scores  of  these 
societies  in  the  past,  and  where  otherwise  honestly  managed 
has  been  the  cause  of  the  numerous  failures  in  this  class  of 
insurance.  In  spite  of  all  the  efforts  to  place  assessment 
rates  on  a  sounder  basis,  their  inadequacy  and  inequity 
as  between  the  younger  and  older  ages  still  continues  to 
threaten  the  permanence  of  a  large  proportion  of  our 
fraternal  societies.  As  we  have  stated,  most  of  the  exist- 
ing societies  are  less  than  thirty  years  old.  In  many  of 
them  the  members  have  only  within  recent  years  reached 


142  YALE  READINGS  IN  INSURANCE 

the  ages  where  these  dangers  in  a  serious  form  began  to 
be  felt.  The  members  themselves  were  generally  unfamiliar 
with  the  principles  of  insurance.  The  favorite  argument 
was  that  a  society  of  this  kind  was  like  any  village  com- 
munity where  the  young  continually  take  the  place  of  the 
old  and  the  community  as  a  whole  grows  no  older.  Hence 
it  was  said  that  a  scale  of  assessments  which  were  suffi- 
cient for  the  early  years  of  such  a  society  would  continue 
so.  I  emphasize  this  point.  It  has  been  in  one  shape  or 
another  the  favorite  argument  and  popular  delusion  among 
the  members  of  these  societies  which  more  than  any  other 
has  been,  and  continues  to  be,  perhaps  the  greatest  ob- 
stacle in  the  way  of  reform.  To  this  day,  when  the  need 
of  large  contributions  on  the  part  of  older  members  is 
urged,  some  veteran  will  bring  forward  the  old  simile  of 
the  village  or  town  community  whose  average  age  is  no 
greater  to-day  than  it  was  a  score  of  years  ago,  and  insist 
that  all  which  the  society  needs  is  to  increase  its  member- 
ship by  securing  new  applicants  in  order  to  bring  down 
the  death  rate  and  make  the  rates  sufficient. 

Let  us  see  why  this  is  not  true,  for  it  is  a  vital  question 
in  this  business.  The  average  ages  of  a  village  community 
remain  unchanged  only  after  that  community  has  reached 
a  normal  average  age  and  only  so  long  as  there  are  neither 
removals  from  or  to  the  village  and  the  birth  rate  just 
keeps  pace  with  the  death  rate.  But  any  change  in  these 
conditions  will  alter  that  average  age  of  the  inhabitants 
until  a  new  normal  age  is  reached.  If  the  average  age  of 
the  inhabitants  is  thirty  years  and  the  births  should  ex- 
ceed the  deaths,  it  would  begin  to  drop  to  some  lower  age. 
On  the  contrary,  if  there  should  be  an  excess  of  deaths  the 
average  age  would  begin  to  go  up.  The  removal  from  or 
to  the  village  of  younger  members  would  have  the  same 
effect.  Throughout  New  England  you  will  find  scores  of 
towns  made  up  almost  entirely  of  elderly  people.  The 
young  folks  have  emigrated  and  the  children  are  missing. 
On  the  contrary,  in  the  great  West  are  hundreds  of  settle- 


FRATERNAL  LIFE  INSURANCE  143 

ments  made  up  chiefly  of  young  settlers  and  their  children, 
whose  average  will  increase  in  the  way  described  until  a 
normal  age  is  reached  as  the  settlement  itself  grows  older. 

The  process  in  these  societies  is  the  same.  When  first 
organized  they  are  chiefly  made  up  of  younger  members 
among  whom  the  deaths  are  comparatively  few.  Rates 
may  be  charged  that  are  not  only  enough  to  pay  the  claims 
as  they  arise,  but  to  create  a  surplus  in  the  hands  of  the 
society.  This  further  helps  to  mislead  the  members,  who 
point  to  the  surplus  as  a  proof  of  the  soundness  of  the 
association.  But  gradually  these  members  grow  older  and 
the  deaths  increase.  For  a  time  new  members  who  are 
young  can  be  procured  to  take  their  places.  But  the  whole 
group  is  still  young  and  unless  the  new  additions  are  largely 
in  excess  of  the  death  losses  and  withdrawals,  the  average 
age  in  such  a  society,  and  with  it  the  death  losses,  will 
continue  to  increase  until  as  in  the  village  community  a 
normal  average  age  is  reached.  If  the  average  age  of  the 
members  in  a  new  society  was  thirty,  for  instance,  it  might 
gradually  increase  to  forty,  although  a  new  young  member 
was  added  for  each  member  that  was  lost.  But  this  is 
not  all.  As  the  members  of  such  a  society  grow  older  the 
death  rate  increases  faster  than  the  age.  At  forty  it  may 
be  only  one  in  a  hundred.  At  sixty  it  will  be  three  times 
as  great.  So  that  while  enough  new  members  may  have 
been  taken  in  to  keep  the  average  age  in  such  a  society 
down  to  the  original  figures,  the  actual  losses  will  continue 
to  roll  up  through  the  increasing  deaths  of  these  older 
members. 

As  the  assessments  for  these  losses  grow  heavier  the 
difficulty  of  procuring  new  members  will  increase,  and  those 
who  have  already  joined  will  continue  to  drop  off  and 
hasten  on  the  ruin  in  the  way  already  described.  The 
society  may  really  be  likened  to  one  of  those  Western 
village  communities  whose  inhabitants  are  all  young  at 
the  start,  but  from  which  the  young  and  healthy  are  grad- 
ually drawn  away  to  more  attractive  settlements  else- 


144  YALE  READINGS  IN  INSURANCE 

where  until  the  whole  becomes  like  a  New  England  village. 
As  the  membership  dwindles  the  average  age  continues 
to  increase  indefinitely. 

When  the  members  of  such  a  society  have  reached  a 
certain  age,  the  cost  of  insurance  becomes  too  heavy  to  be 
borne  by  themselves  unless  aided  by  younger  members. 
It  has  been  found  that  the  average  member  who  has  passed 
much  beyond  the  age  of  sixty  can  no  longer  afford  to  pay 
the  heavy  cost  of  his  own  insurance. 

In  practice,  these  societies  start  with  a  limited  member- 
ship which  they  increase  year  by  year.  The  births  as  it 
were  at  first  far  outnumber  the  deaths  and  as  a  consequence 
for  a  while  there  will  be  no  noticeable  increase  in  the  death 
rate.  This  growth  may  be  rapid  enough  to  conceal  the 
real  conditions  for  years.  But  there  is  another  peculiar 
feature  here.  In  order  to  keep  down  the  death  rate,  not 
only  must  the  society  grow  but  the  number  of  new  mem- 
bers added  must  each  year  become  greater.  Now  there  is 
a  limit  to  this  rate  of  growth  even  under  favorable  cir- 
cumstances. When  it  is  reached,  be  it  sooner  or  later, 
then  the  trouble  begins.  This  is  why  some  of  the  larger 
societies  have  gone  on  year  after  year  with  apparent 
success  while  their  small  competitors  were  in  distress. 
They  were  able  to  increase  their  new  membership  at  a 
faster  rate  than  the  others.  And  what  is  worse,  this  long- 
continued  success  makes  the  members  skeptical  about  the 
insufficiency  of  their  rates  when  the  assessments  finally 
become  inadequate  to  meet  their  claims.  They  simply  rely 
on  their  past  experience. 

It  has  been  a  favorite  argument  too  on  the  part  of  these 
societies  that  the  spirit  of  fraternity  should  be  strong 
enough  to  overcome  any  feeling  of  injustice  among  the 
members  and  to  induce  them  to  make  good  deficiencies. 
In  truly  benevolent  organizations  this  fraternal  feeling 
has  proved  a  valuable  aid  in  sustaining  societies  that  were 
financially  embarrassed.  Both  in  Great  Britain  and 
America,  associations  which,  measured  by  ordinary  mer- 


FRATERNAL  LIFE  INSURANCE  145 

cantile  standards,  would  be  pronounced  hopelessly  insol- 
vent, have  been  carried  along  for  years  through  the  loyal 
support  of  their  members.  Such  was  in  fact  the  condition 
of  many  of  those  British  associations  which  were  finally 
rescued  and  placed  on  a  sound  basis  through  the  adoption 
of  correct  principles. 

And  just  here  I  wish  to  speak  of  a  class  of  associations 
in  this  country  which  are  often  confounded  with  the  fra- 
ternal society  and  whose  disastrous  records  in  the  past 
have  done  much  to  bring  reproach  on  these  associations. 
I  refer  to  a  certain  class  of  assessment  companies,  organ- 
ized on  somewhat  similar  lines,  whose  premiums  were  col- 
lected in  the  shape  of  assessments,  but  which  were  in  reality 
nothing  more  than  ordinary  life  companies,  carried  on  for 
profit  on  the  assessment  principle.  There  were  no  real 
fraternal  features  in  their  make-up  nor  fraternal  feelings 
among  their  members,  who  were  solicited  and  joined  solely 
for  the  purpose  of  securing  insurance  on  what  was  claimed 
to  be  cheaper  terms.  Many  of  them  were  conducted  in  an 
honest  belief  that  the  principle  was  sound.  As  business 
institutions  their  history  has  been  so  replete  with  failures 
that  they  have  evoked  the  severest  condemnation  on  the 
part  of  state  officials  and  called  forth  restrictive  legisla- 
tion. Their  system  has  since  been  admitted  to  be  falla- 
cious by  its  most  intelligent  former  supporters,  and  those 
of  them  which  remain  have  for  the  most  part  abandoned 
or  altered  their  assessment  methods. 

It  is  almost  needless  to  say  that  they  are  not  included  in 
the  subject  of  the  present  lecture.  I  refer  to  them  chiefly 
as  illustrations  that  the  assessment  methods  of  the  fra- 
ternal society  have  proved  fallacious  when  applied  to 
mere  business  companies  in  which  the  principles  of  fra- 
ternalism  were  absent. 

Another  favorite  argument  has  been  that  inequalities 
between  the  members  on  account  of  differences  in  age 
would  in  a  measure  correct  themselves  as  each  member 
in  turn  passed  through  the  successive  ages.  But  this  is 


146  YALE  READINGS  IN  INSURANCE 

assuming  that  each  entered  at  the  same  age  and  survived 
and  retained  his  membership  to  the  end,  none  of  which  are 
true.  Experience  has  shown  that  ordinary  selfish  business 
instincts  influence  the  members  even  in  the  most  fraternal 
of  these  associations,  and  that  new  members  can  neither 
be  procured  nor  existing  members  retained  after  finding 
that  it  is  to  their  interest  to  drop  their  connection. 

Various  plans  have  been  proposed  or  adopted  by  the 
societies  from  time  to  time  in  order  to  remedy  these  con- 
ditions. Assessments  monthly  or  at  other  fixed  periods 
have  now  been  substituted  for  assessments  on  the  death  of 
a  member.  Emergency  and  mortuary  funds  have  been 
accumulated  to  meet  deficiencies,  but  generally  wholly 
inadequate  for  the  purpose.  Diminishing  benefits  at  the 
older  ages  have  been  proposed.  Assessments  graded 
according  to  the  age  at  entry  but  remaining  fixed  there- 
after have  been  tried,  and  this  is  the  present  method 
adopted  by  a  large  number  of  these  societies.  Assess- 
ments increasing  with  each  age  attained  by  the  member 
have  been  proposed.  As  a  compromise,  assessments  in- 
creasing with  each  ten  years,  known  as  the  step-rate  plan, 
have  been  recommended,  as  have  assessments  increasing 
with  each  age  attained  by  the  member  and  covering  the 
cost  of  his  insurance  for  that  year,  known  as  the  natural 
premium  plan;  but  the  trouble  with  this  last  is  that  the 
cost  becomes  too  heavy  for  the  older  members  to  carry. 
A  few  have  actually  accepted  the  better  class  of  British 
friendly  societies  as  their  models  and  have  undertaken, 
like  the  regular  companies,  to  charge  a  level  assessment 
rate  fixed  according  to  the  age  at  entry  and  which  will 
be  large  enough  to  accumulate  a  reserve  that  will  meet 
the  increased  cost  of  insurance  at  the  older  ages,  or  that 
modified  form  of  the  same  referred  to  as  the  step-rate  plan. 

This  is  the  plan  now  advocated  both  by  the  most  intelli- 
gent advisers  of  these  societies  and  by  state  officials.  It 
is  the  plan  which  many  of  the  best  of  these  societies  are 
considering  or  proposing  to  adopt.  It  would  seem  to  be 


FRATERNAL  LIFE  INSURANCE       147 

the  only  true  solution  of  the  difficulty.  Their  insurance 
business  in  order  to  be  permanent  must  be  conducted  on 
the  same  mathematical  principles  as  that  of  ordinary  life 
companies.  This  does  not  mean  that  it  must  in  all  re- 
spects conform  to  the  methods  applicable  to  the  latter. 
The  business  of  the  ordinary  company  is  carried  on  for 
profit.  Its  policy-holders  are  like  the  creditors  of  any 
other  corporation.  The  contract  is  a  rigid  one  and  the 
premiums  are  fixed;  its  commercial  security  demands  that 
both  the  premium  payments  and  reserve  funds  shall  be 
in  excess  of  the  probable  needs,  in  order  to  meet  the  un- 
certainties of  the  future. 

With  the  fraternal  society  the  case  is  different.  The 
insurance  which  it  promises  is  either  simply  a  maximum 
sum  whose  actual  amount  may  be  reduced  by  inability 
to  pay,  or  additional  assessments  may  be  levied  to  make 
good  the  deficiency.  The  conditions  which  would  make  an 
ordinary  life  company  commercially  insolvent  and  lead 
to  its  closing  may  simply  cause  increased  assessments  or 
reduced  benefits  in  the  case  of  the  friendly  society.  The 
fraternal  tics  of  the  members  help  to  hold  them  together 
hi  case  of  adversity. 

The  great  aim  of  these  societies  is  to  furnish  insurance 
at  the  least  possible  immediate  outlay  to  their  members, 
and  to  avoid  the  expenses  incident  to  insurance  as  a  busi- 
ness. Hence  their  paid  officers  and  agents  are  as  few  as 
possible.  The  salaries  needed  for  expert  talent  are  usually 
wanting.  The  work  is  largely  carried  on  through  the 
members  themselves  and  their  lodge  system.  Their 
equipment  for  conducting  the  society  as  a  financial  busi- 
ness corporation  is  limited.  Surplus  in  the  sense  of  busi- 
ness profits  is  regarded  as  foreign  to  their  character,  and 
the  accumulation  of  funds  beyond  what  is  absolutely 
needed  is  discouraged  as  a  temptation  to  extravagance  as 
well  as  an  additional  tax  on  the  members.  Dividends  of 
surplus  profits  to  the  members  are  not  allowed.  Any 
supposed  excess  of  funds  is  met  by  reducing  the  assess- 


148  YALE  READINGS  IN  INSURANCE 

ments,  and  any  interest  which  a  member  might  have  in 
those  funds  is  lost  on  his  withdrawal.  He  has  no  right 
to  claim  a  surrender  value  as  in  the  ordinary  company 
on  giving  up  his  certificate. 

You  note  how  in  all  these  features  the  idea  of  fraternalism 
distinguishes  these  societies  from  ordinary  life  companies. 
They  enter  directly  into  the  question  of  the  proper  remedies 
for  their  defects.  The  failure  on  the  part  of  many  officials 
and  life  insurance  experts  to  properly  appreciate  them  has 
been  one  of  the  difficulties  in  the  way  of  reform.  A  pre- 
mium rate  adequate  to  the  risk  and  a  reserve  adequate  for 
future  deficiencies  in  the  life  insurance  sense  would  seem 
to  be  essentials,  if  they  are  to  furnish  anything  more  than 
mere  temporary  or  term  insurance.  But  it  does  not  fol- 
low that  this  rate  must  be  computed  on  a  table  of  mor- 
tality heavier  than  their  own  experience,  nor  that  it  must 
be  loaded  with  a  margin  for  contingencies  and  expenses 
like  that  of  the  ordinary  life  companies.  Nor  does  it 
follow  that  their  reserve  funds  as  in  the  case  of  ordinary 
companies  should  be  in  excess  of  their  obvious  needs.  It 
would  seem  essential  too  that,  as  in  the  case  of  our  ordinary 
companies,  official  valuations  of  their  assets  and  liabilities 
and  balance  sheets  of  their  accounts  should  be  required. 
It  does  not  follow,  however,  that  the  same  measure  of 
supervision  and  control  over  their  affairs  should  be  exer- 
cised by  the  state  authorities,  since  they  are  not  ordinary 
business  corporations  nor  subject  to  commercial  insolvency 
in  the  strict  sense  of  the  word.  It  is  held  by  many  that 
the  functions  of  the  state  are  ended  when,  as  in  Great 
Britain,  such  valuations  and  balance  sheets  are  published 
and  the  members  are  left  with  a  knowledge  of  the  facts  to 
deal  with  their  societies  as  they  will.  These  are  all  con- 
troverted questions  on  which  I  hesitate  to  express  any 
decided  opinion.  When,  however,  a  society  has  become  so 
mismanaged  or  its  affairs  have  become  so  hopelessly  involved 
that  its  ruin  is  inevitable,  the  state  should  at  least  have 
power  to  prevent  a  further  increase  of  its  membership. 


FRATERNAL  LIFE  INSURANCE  149 

In  new  societies  the  needed  reforms  are  comparatively 
easy.  But  many  of  these  societies  have  been  years  in 
existence.  The  increase  of  their  rates  to  an  adequate 
figure  at  the  older  ages  means  a  heavy  burden  on  their 
older  members  which  some  would  be  unable  to  bear. 
Hence  these  members  are  apt  to  favor  the  inequalities  of 
present  methods.  Otherwise,  they  say,  we  shall  be  driven 
out.  On  the  other  hand,  the  young  member  argues  that 
the  societies  are  for  the  benefit  of  those  with  dependent 
families.  The  families  of  the  old  are  no  longer  dependent, 
and  the  young  should  not  be  forced  to  pay  for  their  insur- 
ance. 

Most  of  the  reforms  thus  far  attempted  have  been  a 
compromise  between  these  two  views.  The  rates  have 
from  time  to  time  been  increased,  especially  at  the  older 
ages  when  deficiencies  arose  that  actually  compelled  it, 
but  never  to  an  adequate  figure,  and  as  the  ages  continued 
to  increase  new  revisions  were  made.  In  some  of  the  older 
societies  such  a  system  of  compromise  may  be  the  only 
solution  of  the  problem  unless  their  old  members  are  to 
be  driven  out  or  their  ability  to  secure  new  members  is  to 
cease  and  the  society  is  allowed  to  collapse.  But  even  then 
the  difficulty  will  be  to  so  regulate  the  inequality  between 
the  groups  that  additions  to  the  young  membership  can 
be  kept  up  until  such  time  as  the  rates  can  step  by  step 
be  finally  raised  to  an  adequate  basis. 

The  hardest  task  of  all  has  been  to  educate  the  mem- 
bers up  to  these  needed  reforms,  which  mean  to  them 
heavier  assessments  and  an  insurance  more  costly  than  was 
promised  when  they  joined.  The  insurance  officials  of  our 
various  states  and  the  best  representative  men  of  these 
societies  themselves  are  now  earnestly  striving  both  through 
legislation  and  through  the  education  of  the  membership 
to  solve  the  difficult  problem.  The  laws  regarding  these 
societies  heretofore  have  been  little  else  than  mere  rules 
for  their  organization  and  management.  No  provisions 
for  securing  their  permanent  solvency  are  made  as  in  the 


150  YALE  READINGS  IN  INSURANCE 

case  of  our  ordinary  life  companies.  In  most  of  the  states 
they  have  been  left  to  run  their  own  course.  Their  mem- 
bers as  a  body  are  exceedingly  jealous  of  attempts  by  legis- 
lation to  increase  the  cost  of  the  insurance  which  they 
offer  or  in  any  way  to  reduce  their  popularity  or  their 
freedom  of  action.  Through  the  ballot  box  they  have 
stood  ready  by  their  numbers  to  defeat  any  attempted 
laws  which  they  believe  to  be  inspired  by  a  spirit  of  antag- 
onism. Any  attempted  legislation  for  the  regulation  of 
these  societies  to  be  successful  must  be  framed  in  a  friendly 
attitude  with  a  recognition  of  their  rights  as  mutual  clubs 
to  regulate  their  own  affairs  within  proper  limits. 

A  healthy  change,  however,  has  been  gradually  taking 
place  within  the  last  few  years  in  the  attitude  of  their  own 
members  as  well  as  of  the  public.  The  opposition  to  legal 
interference  of  any  kind  has,  in  a  measure,  yielded  to  a 
growth  of  public  sentiment  favoring  state  regulation  of 
insurance.  This  movement  has  been  aided  by  the  popular 
excitement  which  followed  the  exposures  of  mismanage- 
ment on  the  part  of  some  of  the  regular  life  companies 
in  1905.  Prominent  fraternal  organizations,  which  had 
long  enjoyed  a  wide  popularity,  as  well  as  smaller  societies, 
have  found  themselves  facing  a  threatened  deficiency  in 
the  near  future  in  consequence  of  a  rapid  increase  of  death 
claims.  Investigations  have  shown  their  managers  that  a 
radical  increase  in  their  rates  is  essential  to  their  con- 
tinued existence.  Such  increase  has  been  at  times  strongly 
opposed  by  those  of  the  members  who  felt  unable  to  carry 
the  burden.  The  effect  of  the  agitation  has  been  a  more 
general  recognition  of  the  fact  that  the  rates  must  be  fixed 
according  to  age  and  must  be  based,  like  those  of  ordinary 
life  companies,  on  an  adequate  table  of  mortality.  The 
National  Fraternal  Congress,  an  association  made  up  of 
representatives  of  the  best  of  the  fraternal  orders,  earnestly 
took  up  the  subject  a  few  years  ago  and  urged  upon  its 
members  the  adoption  of  such  rates  based  upon  the  actual 
mortality  experienced  by  the  societies,  and  the  mainte- 


FRATERNAL  LIFE  INSURANCE  151 

nance  of  a  reserve  like  that  of  ordinary  life  companies 
sufficient  to  meet  the  deficiencies  of  the  older  ages,  but 
limited  to  the  actual  amount  mathematically  estimated 
to  be  necessary,  allowing,  however,  no  margins  for  con- 
tingencies or  profits  and  leaving  any  resultant  deficiencies 
to  be  cared  for  by  assessments,  as  before.  Under  the  super- 
vision of  this  Congress  the  mortality  of  the  societies,  which 
it  represented,  was  compiled  and  a  mortality  table  was 
framed  known  as  the  Fraternal  Congress  Table.  The 
rates  computed  from  this  table  have,  from  time  to  time, 
been  adopted  by  a  number  of  these  societies  and  in  some 
states  their  adoption  by  new  societies  has  been  made  com- 
pulsory by  statute.  They  are  not  assumed  to  be  adequate 
for  societies  that  are  in  an  unsound  condition,  but  to  be 
an  essential  aid  in  their  restoration  to  strength  by  redu- 
cing the  future  assessments  which  will  be  required  if  the 
prospective  death  rate  has  not  already  become  too  excess- 
ive. Various  states,  too,  during  the  past  few  years  have 
empowered  their  insurance  departments  to  exercise  a 
measure  of  supervision  over  these  societies  and  have  com- 
pelled the  latter  to  make  returns  regarding  their  business. 
But  the  supervision  and  returns  have  thus  far  been  limited 
to  publicity  regarding  the  general  conduct  and  condition 
of  their  business.  No  estimate  is  required  of  their  actual 
liabilities  and  little  light  is  thrown  on  their  future  ability 
to  meet  their  obligations,  except  such  as  may  be  gathered 
from  the  facts  presented.  The  theory  that  the  state  is 
concerned  only  with  their  proper  conduct  and  existing 
status  is  still  adhered  to. 

A  special  interest  just  now  attaches  to  fraternal  societies, 
in  view  of  the  popular  agitation  for  a  system  of  compulsory 
insurance,  or  protection  for  employees  analogous  to  those 
now  existing  in  Germany  and  Great  Britain.  The  organiza- 
tion of  mutual  companies  for  the  insurance  of  various 
classes  of  employees,  similar  in  principle  at  least  to 
fraternal  orders,  has  been  among  the  methods  suggested  in 
the  United  States. 


152  YALE  READINGS  IN  INSURANCE 

Now  a  few  words  in  conclusion  concerning  the  character 
of  the  insurance  offered  by  these  societies.  In  essential 
respects  it  is  widely  different  from  that  furnished  by  our 
regular  companies.  In  the  first  place  it  is  strictly  benevo- 
lent in  its  character  and  limited  to  the  members  and  their 
dependents.  It  aims  to  relieve  the  necessities  of  these  in 
a  way  more  effectual  than  the  random  charitable  assistance 
furnished  by  ancient  associations.  It  needs  for  its  suc- 
cess that  the  members  should  be  bound  by  a  spirit  of  real 
fraternity  to  their  association,  and  not  use  their  member- 
ship as  a  mere  cloak  for  ordinary  insurance  purposes.  It 
needs  that  the  members  should  be  actively  interested  in 
the  affairs  of  the  society  and  should  be  ready  to  bear  their 
share  of  the  burdens  in  case  of  errors  in  its  management. 
Their  fraternal  bonds  are  the  chief  substitute  for  the  com- 
mercial security  required  of  an  ordinary  business  corpora- 
tion. 

To  that  large  class  in  the  community  whose  instincts  and 
tastes  lead  them  to  seek  insurance  protection  from  such 
societies  they  aim  to  offer  that  protection  at  the  smallest 
immediate  cost.  The  work  is  done  chiefly  by  the  members. 
Expenses  are  reduced  to  a  minimum.  No  dividends  are 
provided  for  and  the  assessment  rates  are  reduced  to  the 
lowest  figures.  These  are  the  strong  points  urged  by  its 
advocates.  Fraudulent  claims  too  are  less  likely  where 
the  members  take  a  personal  interest,  and  for  that  reason 
these  societies,  in  theory  at  least,  should  be  peculiarly 
adapted  to  deal  with  sick  and  accident  risks  where  fraud 
is  a  special  danger. 

On  the  other  hand,  this  insurance  must  of  necessity  lack 
those  elements  of  commercial  security  which  attach  to  the 
ordinary  life  company  as  a  business  institution  conducted 
by  experts  protected  by  large  cash  accumulations  and 
regulated  by  laws  enacted  with  a  view  to  permanent  sol- 
vency. Until  at  least  the  reforms  referred  to  have  been 
carried  out,  this  insurance  can  hardly  be  regarded  as  of 
more  than  a  temporary  character  covering  the  younger 


FRATERNAL  LIFE  INSURANCE  153 

and  more  productive  years  of  life,  with  the  contingency 
that  the  cost  at  old  age  may  prove  too  heavy  to  be  borne 
or  that  inability  to  keep  up  its  membership  may  cause 
default.  In  view  of  the  fact  that  the  whole  machinery  of 
these  societies  is  organized  on  a  benevolent  rather  than  a 
business  basis,  it  has  been  seriously  questioned  how  far 
they  should  attempt  to  grant  endowments  or  large  life 
insurance  benefits  which  involve  investments  of  capital 
for  the  beneficiaries  rather  than  a  simple  relief  from  mis- 
fortune. 

I  believe  that  their  work  should  be  confined  within  their 
legitimate  sphere  and  that  associations,  whether  incorpo- 
rated or  not,  should  not  be  permitted  to  organize  and  con- 
duct their  affairs  as  benevolent  societies  while  they  are 
merely  seeking  through  this  device  to  sell  ordinary  life 
insurance  to  the  public.  Those  who  wish  to  purchase  life 
insurance  policies  as  they  would  purchase  ordinary  stocks 
or  bonds  as  a  pure  business  investment,  who  desire  insur- 
ance contracts  which  shall  be  commercial  and  marketable 
in  their  character  and  who  care  nothing  for  the  institu- 
tion which  may  furnish  them,  should  seek  their  protection 
from  the  ordinary  companies  that  deal  with  insurance 
simply  as  a  business. 

The  numerous  failures  among  these  societies  in  the  past 
and  the  disappointments  resulting  from  the  errors  in  their 
management  have  called  forth  severe  criticism  and  even 
condemnation  of  the  system  itself  from  many  quarters. 
This  has  been  largely  aided  by  the  disastrous  operations 
of  organizations  which  were  in  reality  life  companies 
carried  on  for  mere  business  purposes  but  employing  the 
methods  of  the  fraternal  associations.  Despite  the  failures 
it  must  be  remembered  they  have  furnished  temporary 
protection  to  millions  of  families  and  have  distributed 
hundreds  of  millions  among  the  needy  dependents  of  their 
members.  It  should  be  said  too  that,  carrying  small 
accumulated  funds,  the  actual  moneyed  losses  have  been 
small  compared  with  the  failures.  The  gravest  loss  has 


154  YALE  READINGS  IN  INSURANCE 

been  the  disappointment  of  those  whose  protection  failed 
at  an  age  when  they  could  no  longer  afford  to  purchase 
fresh  insurance. 

Despite  their  defects  these  societies  are  doing  a  great 
and  responsible  work  among  those  who  prefer  the  form  of 
protection  which  they  offer.  The  communal  spirit  which 
created  the  ancient  clubs  of  Rome  and  the  guilds  of  more 
modern  Europe  has  been  strengthened  by  the  antagonistic 
spirit  of  selfish  individualism  which  characterizes  our 
commercial  age.  Fraternal  insurance  should  be  dealt 
with  as  an  evolution  of  these  more  primitive  societies  that 
is  here  to  stay,  backed  by  the  votes,  if  need  be,  of  the  mil- 
lions who  support  it;  but  calling  as  in  Great  Britain  for 
beneficent  laws  and  the  intelligent  cooperation  of  its  mem- 
bership to  remedy  its  defects. 


CHAPTER  XI 

NET   PREMIUMS1 

AFTER  a  table  of  mortality  and  a  rate  of  interest  are 
designated,  the  method  of  calculating  net  values  in  life 
insurance  is  simple  when  carefully  explained.  The  net 
premium  is  the  amount  that  will,  on  the  designated  data 
—  namely,  rate  of  interest  and  table  of  mortality  —  exactly 
effect  the  insurance.  In  this  calculation,  expenses  and 
profits  are  left  out  of  consideration. 

Life  insurance  calculations  are  made,  first  on  the  sup- 
position that  the  amount  insured  is  $1.  Having  obtained 
the  net  premium  that  will  insure  $1,  the  net  premium  that 
will  effect  similar  insurance  for  $100,  $1000,  or  any  other 
named  sum,  is  found  by  multiplying  the  net  premium  that 
will  insure  $1  by  the  sum  actually  insured.  It  is  assumed 
that  the  payment  of  the  premium  is  made  at  the  time  the 
insurance  is  effected;  this  is  called  the  beginning  of 
the  policy  year,  and  the  amount  insured  is  to  be  paid  at 
the  end  of  that  policy  year  in  which  the  insured  may  die. 

Interest.  —  The  first  thing  to  be  considered,  in  making 
calculations  for  net  premiums,  is  the  method  by  which 
we  determine  the  amount  of  money  that  will,  when  in- 
creased by  interest  at  a  given  rate  per  annum,  compounded 
annually,  produce  $1  in  any  designated  number  of  years. 
Suppose  that  the  rate  of  interest  is  4  per  cent,  per  annum. 
The  amount  that  will  at  this  rate  produce  $1  in  one  year, 
when  the  principal  and  interest  thereon  for  one  year  are 

1  By  Gustavus  W.  Smith.  Reprinted  from  pages  13-33  of  "Notes 
on  Life  Insurance";  S.  W.  Green.  New  York,  1875. 

155 


156  YALE  READINGS  IN  INSURANCE 

added  together,  is  expressed  by  ^  =  ~  =  $0.961538,  plus 
other  decimal  figures. 

If  the  rate  of  interest  is  4£  per  cent,  per  annum,  the 
amount  in  hand  that  will,  at  this  rate,  produce  $1  in  one 
year  is  expressed  by  y^j  =  ^  =  $0.956938.  In  general, 
divide  $1  by  one  plus  the  rate  of  interest,  in  order  to 
obtain  the  amount  that  will,  if  invested  at  this  rate  of 
interest,  produce  $1  in  one  year. 

Having  obtained  the  amount  that  will,  at  the  given  rate 
of  interest,  produce  $1  in  one  year,  in  order  to  obtain 
the  amount  that  will,  at  the  same  rate  of  interest  per 
annum,  produce  $1  in  two  years,  interest  being  compounded 
annually,  we  multiply  the  amount  that  will  produce  $1  in 
one  year  by  itself.  For  instance,  the  amount  that  will 
produce  $1  in  one  year  at  4  per  cent,  being  expressed  by 
Yfji,  the  amount  that  will,  at  the  same  rate  of  interest, 
compounded  annually,  produce  $1  in  two  years,  is 
expressed  by  £~  X  ^  =  $0.924556. 

If  the  rate  of  interest  is  4£  per  cent.,  the  expression  be- 
comes r§s  X  j^  =  $0.915730. 

The  amount  that  will,  at  4  per  cent.,  produce  $1  in  three 
years  is  expressed  by  ^  X  ^  X  ^  =  $0.888996.  Interest 
being  4^  per  cent.,  the  expression  becomes  j-^  X  j-^  X  ^ 
=  $0.876297. 

In  general,  to  obtain  the  amount  that  will,  if  invested 
at  any  given  rate  of  interest,  compounded  annually,  pro- 
duce $1  in  any  designated  number  of  years,  the  rule  is: 
Divide  $1  by  one  plus  the  rate  of  interest,  and  multiply  the 
quotient  by  itself  a  number  of  times  equal  to  the  number  of 
years  less  one.  That  is  to  say,  for  two  years,  multiply 
once;  for  three  years,  twice;  for  four  years,  three  times, 
and  so  on. 

These  calculations  have  been  made,  and  the  results, 
at  various  rates  of  interest,  have  been  placed  in  appended 
tables. 

There  is  at  present  one  table  of  mortality  in  quite  general 


NET  PREMIUMS 


157 


use  in  the  United  States.  The  American  Experience 
Table  of  Mortality  is  given  below.  It  will  be  noticed  that 
it  is  assumed  that  there  are  100,000  persons  living  at  age  10. 
In  the  column  headed  "deaths  each  year"  will  be  found 
opposite  age  10  the  number  that  will  die  between  age  10 
and  age  11.  This  will  leave  a  certain  number  living  at 
age  11.  This  number  is  placed  opposite  age  11,  in  the 
column  headed  "  number  living,"  and  opposite  age  11  in 
the  column  headed  "deaths  each  year"  is  placed  the  num- 
ber that  die  between  age  11  and  age  12. 

AMERICAN  EXPERIENCE  TABLE  OP  MORTALITY 


Age 

Number 
Living 

Deaths 
Each 
Year 

Death 
Rate 
Per 
1000 

Expecta- 
tion of 
Life 

Age 

Number 
Living 

Deaths 
Each 
Year 

Death 
Rate 
Per 
1000 

Expec- 
tation 
of  Life 

10 

100,000 

749 

7.49 

48.72 

35 

81,822 

732 

8.95 

31.78 

11 

99,251 

746 

7.52 

48.08 

36 

81,090 

737 

9.09 

31.07 

12 

98,505 

743 

7.54 

47.45 

37 

80,353 

742 

9.23 

30.35 

13 

97,762 

740 

7.57 

46.80 

38 

79,611 

749 

9.41 

29.62 

14 

97,022 

737 

7.60 

46.16 

39 

78,862 

756 

9.59 

28.90 

15 

96,285 

735 

7.63 

45.50 

40 

78,106 

765 

9.79 

28.18 

16 

95,550 

732 

7.66 

44.85 

41 

77,341 

774 

10.01 

27.45 

17 

94,818 

729 

7.69 

44.19 

42 

76,567 

785 

10.25 

26.72 

18 

94,089 

727 

7.73 

43.53 

43 

75,782 

797 

10.52 

26.00 

19 

93,362 

725 

7.76 

42.87 

44 

74,985 

812 

10.83 

25.27 

20 

92,637 

723 

7.80 

42.20 

45 

74,173 

828 

11.16 

24.54 

21 

91,914 

722 

7.85 

41.53 

46 

73,345 

848 

11.56 

23.81 

22 

91,192 

721 

7.91 

40.85 

47 

72,497 

870 

12.00 

23.08 

23 

90,471 

720 

7.96 

40.17 

48 

71,627 

896 

12.51 

22.36 

24 

89,751 

719 

8.01 

39.49 

49 

70,731 

927 

13.11 

21.63 

25 

89,032 

718 

8.06 

38.81 

50 

69,804 

962 

13.78 

20.91 

26 

88,314 

718 

8.13 

38.12 

51 

68,842 

1,001 

14.54 

20.20 

27 

87,596 

718 

8.20 

37.43 

52 

67,841 

1,044 

15.39 

19.49 

28 

86,878 

718 

8.26 

36.73 

53 

66,797 

1,091 

16.33 

18.79 

29 

86,160 

719 

8.34 

36.03 

54 

65,706 

1,143 

17.40 

18.09 

30 

85,441 

720 

8.43 

35.33 

55 

64,563 

1,199 

18.57 

17.40 

31 

84,721 

721 

8.51 

34.63 

56 

63,364 

1,260 

19.88 

16.72 

32 

84,000 

723 

8.61 

33.92 

57 

62,104 

1,325 

21.33 

16.05 

33 

83,277 

726 

8.72 

33.21 

58 

60,779 

1,394 

22.94 

15.39 

34 

82,551 

729 

8.83 

32.50 

59 

59,385 

1,468 

24.72 

14.74 

158 


YALE  READINGS  IN  INSURANCE 


AMERICAN  EXPERIENCE  TABLE  OF  MORTALITY  —  Continued 


Age 

Number 
Living 

Deaths 
Each 
Year 

Death 
Rate 
Per 
1000 

Expec- 
tation 
of  Life 

Age 

Number 
Living 

Deaths 
Each 
Year 

Death 
Rate 
Per' 
1000 

Expec- 
tation 
of  Life 

60 

57,917 

1,546 

26.69 

14.10 

78 

18,961 

2,291 

120.83 

5.11 

61 

56,371 

1,628 

28.88 

13.471 

79 

16,670 

2,196 

131.73 

4.74 

62 
63 

54,743 
53,030 

1,713 
1,800 

31.29 
33.94 

12.86 
12.26 

80 
81 

14,474 
12,383 

2,091 
1,964 

144.47 
158.60 

4.39 
4.05 

64 

51,230 

1,889 

36.87 

11.67 

82 

10,419 

1,816 

174.30 

3.71 

65 
66 
67 

49,341 
47,361 
45,291 

1,980 
2,070 
2,158 

40.13 
43.71 
47.65 

11.10 
10.54 
10.00 

83 

84 
85 

8,603 
6,955 

5,485 

1,648 
1,470 
1,292 

191.56 
211.36 
235.55 

3.39 

3.08 
2.77 

68 

43,133 

2,243 

52.00 

9.47 

86 

4,193 

1,114 

265.68 

2.47 

69 

40,890 

2,321 

56.76 

8.97 

87 

3,079 

933 

303.02 

2.18 

70 

38,569 

2,391 

61.99 

8.48 

88 

2,146 

744 

346.69 

1.91 

71 

36,178 

2,448 

67.66 

8.00 

89 

1,402 

555 

395.86 

1.66 

72 

33,730 

2,487 

73.73 

7.55 

90 

847 

385 

454.54 

1.42 

73 

31,243 

2,505 

80.18 

7.11 

91 

462 

246 

532.47 

1.19 

74 

28,738 

2,501 

87.03 

6.68 

92 

216 

137 

634.26 

.98 

75 

26,237 

2,476 

94.37 

6.27 

93 

79 

58 

734.18 

.80 

76 

77 

23,761 
21,330 

2,431 
2,369 

102.31 
111.06 

5.88 
5.49^ 

94 
95 

21 
3 

18 
3 

857.14 
1000.00 

.64 
.50 

Various  other  tables  of  mortality  are  sometimes  used 
in  making  life  insurance  calculations,  but  it  is  not  necessary 
to  give  them  here.  Mortality  tables  are  all  based  upon 
statistical  information,  obtained  by  observation  and  ex- 
perience. It  is  assumed  that  each  insured  person  at  any 
particular  age  has  the  average  chance  of  living  for  one  year 
that  is  indicated  by  the  table  at  that  age. 

Manner  of  Using  the  Mortality  Table.  —  In  illustration 
of  the  calculation  of  the  chance  that  a  person  may  die 
during  any  given  time,  let  us  suppose  that  out  of  one 
hundred  persons  condemned  to  be  shot  on  a  given  day, 
all  are  reprieved  for  the  day,  except  one,  and  the  one  to 
be  shot  is  to  be  the  one  who  draws  the  black  ball  out  of  a 
box  containing  ninety-nine  white  balls  and  one  black 
one.  The  chance,  before  the  drawing,  of  any  particular 


NET  PREMIUMS  159 

man's  getting  the  black  ball,  and,  therefore,  his  chance 
of  being  shot  that  day,  is  one  only  out  of  one  hundred.  If 
two  men  had  to  die  that  day,  each  individual's  chance, 
before  the  drawing,  of  getting  a  black  ball  would  be  twice 
as  great  as  it  was  before;  for  now  there  are  two  black  balls 
and  only  ninety-eight  white  ones  in  the  box.  The  chance 
in  this  case  would  be  two  out  of  one  hundred;  for  three 
persons,  three  out  of  one  hundred;  and  so  on  to  the  limit 
of  one  hundred  out  of  one  hundred  —  which  would  make 
it  certain  that  each  man  would  be  shot. 

To  apply  this  principle  to  life  insurance,  and  to  show 
that  the  amount  that  will  insure  $1,  to  be  paid  certain 
at  the  end  of  any  year,  when  multiplied  by  the  fraction 
which  represents  the  chance  that  the  person  will  die  dur- 
ing the  year,  gives  what  it  is  worth  to  insure  $1,  to  be  paid 
at  the  end  of  the  year,  in  case  the  insured  dies  during  the 
year :  let  us  suppose  that,  out  of  one  hundred  persons  alive 
at  the  beginning  of  the  year,  it  is  known  that  one  of  them, 
and  one  only,  will  die  during  the  year.  The  value  of  $1, 
to  be  paid  certain  at  the  end  of  one  year,  in  the  particular 
case  of  interest  at  4|  per  cent.,  is  $0.956938.  The  chance 
that  the  person  will  die  during  the  year  is  one  out  of  one 
hundred.  To  make  it  certain  that  his  heirs  will  obtain 
$1  at  the  end  of  the  year,  he  must  advance  $0.956938  at 
the  beginning  of  the  year.  But  the  $1  is  not  to  be  paid 
certain;  it  is  to  be  paid  only  in  case  he  dies.  Suppose  the 
whole  one  hundred  persons  are  insured;  then,  since  there 
is  but  one  to  die,  and  but  $1  to  be  paid,  each  person  will 
have  to  give  only  the  one  hundredth  part  of  $0.956938  in 
order  to  make  up  what  is  necessary  to  pay  this  $1  at  the 
end  of  the  year.  Therefore,  $0.956938  divided  by  100 
is  what  each  man  would  have  to  pay.  In  case  it  is  known 
that  two  persons  out  of  the  one  hundred  will  die,  the 
amount  requisite  to  effect  the  insurance  will  be  twice  as 
much  as  before,  because  $2  must  be  paid  certain  at  the 
end  of  the  year.  The  chance  that  each  person  may  die 
during  the  year  is  twice  as  great  as  in  the  first  case,  and 


160  YALE  READINGS  IN  INSURANCE 

is  therefore  two  out  of  one  hundred;  and  the  amount  that 
each  person  will  have  to  pay  for  his  insurance  is  $0.956938, 
divided  by  100,  and  the  result  multiplied  by  2.  In  case 
it  is  known  that  all  of  them  will  die  during  the  year,  the 
fraction  which  represents  the  chance  that  any  particular 
individual  will  die  becomes  y$$,  or  unity.  This  represents 
the  certainty;  and  to  insure  $1,  to  be  paid  at  the  end  of  the 
year  to  the  heirs  of  the  insured,  in  case  he  dies  during  the 
year,  each  person  will  now  have  to  pay  -j$$  of  $0.956938 
-  that  is  to  say,  each  must,  in  this  case,  pay  enough  to 
make,  with  interest  at  4J  per  cent,  added,  the  full  amount 
for  which  he  is  insured. 

To  Insure  $1  for  One  Year  at  Age  30.  —  The  American 
Experience  Table  shows  that  out  of  100,000  persons  living 
at  age  10,  there  will  be  85,441  living  at  age  30.  The  num- 
ber of  deaths  between  age  30  and  age  31  is  720.  There- 
fore, tflffi  is  the  fraction  which  represents  the  chance 
that  the  insured  will  die  before  he  is  31  years  of  age. 

The  present  value  of  $1  to  be  paid  certain  at  the  end  of 
one  year  has,  in  the  case  of  interest  at  4^  per  cent.,  been 
found  to  be  equal  to  $0.956938.  Multiply  this  by  the  frac- 
tion ^||fi  which  represents  the  chance  that  the  insured 
will  die  during  the  year  between  age  30  and  age  31,  and 
we  have  $0.0081064.  This  is  the  value  of  the  risk  on  $1, 
or  what  it  is  worth  to  insure  $1,  to  be  paid  to  the  heirs  of 
a  person  at  the  end  of  one  year,  in  case  he  dies  during  the 
year,  the  age  of  the  insured  being  30  years  at  the  time 
he  takes  out  the  policy.  It  would  require  one  thousand 
times  as  much  to  insure  $1000  as  it  does  to  insure  $1,  and 
half  as  much  to  insure  half  a  dollar  as  it  does  a  whole 
dollar.  We  can  obtain,  by  using  the  mortality  table,  the 
fraction  representing  the  chance  that  a  person  of  any  given 
age  will  die  during  the  succeeding  year,  just  as  we  did  in 
this  case  for  age  30.  We  have,  therefore,  already  deter- 
mined the  means  for  calculating  the  sum  that  will  at  any 
age  insure  $1,  to  be  paid  to  the  heirs  of  the  insured  in  one 
year,  in  case  he  dies  during  the  year;  but  we  must  know 


NET  PREMIUMS 


161 


the  age  of  the  person,  the  rate  of  interest  must  be  fixed, 
and  a  mortality  table  must  be  available  for  use  in  the 
calculations. 

The  following  table  shows  the  net  amount  that  will 
insure  $1000  for  one  year  at  different  ages  from  20  to  70 
inclusive,  the  calculations  being  all  based  upon  the  Ameri- 
can Experience  Table  of  Mortality,  with  interest  at  4 
per  cent. 


COST  OF  INSURANCE  ON  $1000   FOR  ONE  YEAR,  AT  DIFFERENT  AGES 
—  AMERICAN  EXPERIENCE 


Age 

Cost  of 
Insurance 

Age 

Cost  of 
Insurance 

Age 

Cost  of 
Insurance 

20   ... 

$7.504 

37    ... 

$8.879 

54    ... 

$16.727 

21   ... 

7.553 

38  ... 

9.046 

55   ... 

17.857 

22   ... 

7.602 

39   ..  . 

9.218 

56   ... 

19.120 

23  ..  . 

7.652 

40  ... 

9.418 

57  ... 

20.515 

24  ... 

7.703 

41   ... 

9.623 

58  ... 

22.053 

25  ... 

7.754 

42   ... 

9.858 

59   ... 

23.769 

26  ... 

7.815 

43  ... 

10.113 

60  ... 

25.667 

27   ... 

7.881 

44  ... 

10.412 

61   ... 

27.769 

28  ... 

7.947 

45  ... 

10.734 

62   ... 

30.088 

29  ... 

8.024 

46  ... 

11.117 

63   ... 

32.638 

30  ... 

8.103 

47  ... 

11.539 

64  ... 

35.455 

31  ... 

8.183 

48   ... 

12.028 

65  ... 

38.585 

32   ... 

8.276 

49   ... 

12.602 

66   ... 

42.026 

33  ... 

8.383 

50  ... 

13.251 

67   ... 

45.815 

34  ... 

8.491 

51   ... 

13.981 

68  ... 

50.002 

35  ... 

8.602 

52   ... 

14.797 

69   ... 

54.579 

36  ... 

8.739 

53  ... 

15.705 

70  ... 

59.608 

In  further  illustration  of  the  question  of  net  premiums 
and  net  values  of  life  policies  in  case  the  insurance  is  for 
one  year  only,  we  will  suppose  that  the  age  of  the  person 
applying  for  insurance  is  40,  the  mortality  table  used  the 
Actuaries',  the  rate  of  interest  is  4  per  cent.,  the  insurance 
to  be  for  one  year,  the  amount  of  the  policy  $10,000,  and 


162  YALE  READINGS  IN  INSURANCE 

the  policy-holder  is  a  fair  average  of  insured  lives.  What 
amount  in  hand  ought  to  be  paid  to  insure  $10,000  as 
above,  leaving  out  all  consideration  of  expenses,  and 
having  neither  gain  nor  loss  represented  in  the  chances 
of  the  transaction? 

We  will  first  determine  the  amount  that  will  insure  $1. 
The  present  value  of  $1  to  be  paid  certain  at  the  end  of 
one  year,  interest  being  assumed  at  4  per  cent,  per  annum, 
is  equal  to  $0.961538.  From  the  mortality  table  we  find 
that  out  of  100,000  persons  living  at  age  10,  there  are 
78,653  living  at  age  40,  and  that  815  of  these  will  die 
during  the  year  between  age  40  and  age  41.  Therefore, 
T  tils'  *s  ^e  faction  which  represents  the  chance  that  the 
insured  will  die  during  the  year;  and  this  multiplied  by 
$0.961538,  which  is  the  present  value  of  $1,  to  be  paid  cer- 
tain at  the  end  of  one  year,  will  give  what  it  is  now  worth 
to  insure  the  $1,  to  be  paid  in  case  the  insured  dies  during 
the  year,  or  $0.961538  X  yfMs  =  $0.009963432.  This, 
multiplied  by  10,000,  makes  $99.63,  plus  a  fraction  of  a 
cent,  which  is  the  net  premium  that  will  insure  $10,000, 
to  be  paid  to  the  heirs  of  the  person  insured  at  the  end  of 
one  year;  provided  he  dies  during  the  year. 

If  every  one  of  the  whole  78,653  had  been  insured  for 
one  year  in  the  sum  of  $10,000  each,  the  heirs  of  the  815 
who  died  were  respectively  entitled  to,  and  were  paid, 
$10,000  each.  The  aggregate  payment  of  losses  by  death, 
for  the  year,  amounted,  therefore,  to  $8,150,000.  The 
net  annual  premiums,  $99.63  each,  on  78,653  policies,  when 
increased  by  4  per  cent,  interest,  amounted  at  the  end  of 
the  year  to  $8,149,996.43. 

It  is  seen  from  this,  that  the  fraction  of  a  cent  omitted 
in  each  of  the  78,653  premiums  amounted,  in  the  aggregate, 
to  a  deficiency  of  $3.57,  in  paying  $8,150,000  losses  by 
death.  The  77,838  persons  who  did  not  die  during  the 
year,  in  this  case  receive  nothing.  They  are  not  entitled 
to  anything;  they  had  their  lives  insured  during  the  year; 
they  each  paid  in  advance  a  net  premium  amounting  to 


NET  PREMIUMS  163 

).63;  the  whole  of  this,  and  net  interest  on  it,  has  gone 
to  pay  at  the  end  of  the  year  $10,000  to  the  heirs  of  each 
of  the  815  policy-holders  that  died  during  the  year. 

Net  Single  Premiums  for  Insurance  for  Whole  Life.  — 
What  sum  paid  in  hand  will,  "on  the  supposition  that  the 
mortality  table  and  rate  of  interest  designated  as  the  basis  of 
the  calculations  are  correct,"  be  the  exact  equivalent  of  $1 
insured,  to  be  paid  at  the  end  of  any  year  in  which  the 
insured  may  die?  In  other  words,  we  have  now  to  deter- 
mine the  amount  that,  if  paid  in  hand,  will  exactly  insure 
$1  for  whole  life.  The  problem  before  us  reduces  to  this, 
namely:  First,  calculate  the  present  value  of  the  amount 
requisite  to  effect  the  insurance  each  separate  year  that 
the  insured  may  live,  as  indicated  by  the  designated  table 
of  mortality.  Then  add  together  the  respective  amounts 
that  are  found  to  be  necessary  to  effect  the  insurance  each 
year,  and  their  sum  will  give  the  amount  that,  if  paid 
in  hand,  will  effect  the  insurance  for  whole  life. 

Assume  that  the  age  of  the  person  at  the  time  he  in- 
sures is  40,  that  he  is  a  fair  average  of  insured  lives,  the 
table  of  mortality  is  the  Actuaries',  and  the  rate  of  interest 
4  per  cent.,  compounded  annually.  We  have  already  found 
that  the  amount  necessary  in  this  case  to  insure  $1,  to  be 
paid  to  the  heirs  of  the  insured  in  case  he  dies  during  the 
first  year  —  that  is,  between  age  40  and  age  41  —  is 
$0.009963432.  Now  let  us  see  what  amount  of  money, 
if  paid  in  hand  at  the  time  the  policy  is  issued  (age  40),  will 
secure  $1  to  be  paid  to  the  heirs  of  the  insured  at  the  end 
of  two  years,  in  case  he  dies  in  the  second  year  from  the 
date  of  the  policy.  This  problem  is  solved  separately, 
and  the  amount  we  are  now  to  find  insures  only  against 
death  in  the  second  year. 

Find  the  amount  that  will,  if  invested  at  4  per  cent,  per 
annum,  compound  interest,  produce  $1  in  two  years.  To 
do  this,  we  have  to  divide  100  by  104;  this  gives  $0.961538, 
and  this  is  the  amount  that  will  produce  $1  in  one  year  at 
4  per  cent,  per  annum.  Multiply  this  by  itself,  and  we 


164  YALE  READINGS  IN  INSURANCE 

have  $0.924556,  which  is  the  amount  that  will  produce  $1 
in  two  years  at  4  per  cent.,  compounded  annually. 

Now,  the  question  is,  what  fraction,  at  age  40  (the  time 
at  which  the  insurance  is  effected),  represents  the  chance 
that  the  insured  will  die  during  the  second  year  —  that 
is,  between  age  41  and  age  42? 

By  the  Actuaries'  Table  of  Mortality,  we  see  that  out 
of  78,653  insured  persons  living  at  age  40,  the  number  that 
will  die  between  age  41  and  age  42  is  826.  Therefore,  the 
fraction  826  divided  by  78,653  represents  at  the  time  this 
insurance  is  effected,  age  40,  the  chance  that  the  insured 
will  die  betweeen  age  41  and  age  42. 

Multiply  the  amount,  $0.924556,  that  will,  at  the  desig- 
nated rate  of  interest,  produce  $1  certain  in  two  years,  by 
the  fraction  y|||^  which  represents  the  chance  that  the 
$1  insured  will  have  to  be  paid,  and  we  have  $0.009705, 
which  is  the  amount  that  will,  if  paid  in  hand  at  age  40, 
insure  $1,  to  be  paid  to  the  heirs  of  the  insured  in  case  he 
dies  in  the  second  year. 

In  like  manner,  we  can  find  the  amount  that,  if  paid  in 
hand  at  age  40,  will  insure  $1  to  the  heirs  of  the  insured 
in  case  he  dies  in  the  third  year  —  and  for  each  and  every 
year  up  to  and  including  the  table  limit. 

Add  together  these  respective  yearly  amounts,  and  the 
result  gives  the  net  single  premium  that  will,  if  paid  in 
hand  at  age  40,  insure  $1  for  whole  life. 

The  amount  in  this  case  is  $0.38104;  multiply  this  by 
1000,  and  we  have  $381.04,  which  is  the  net  single  premium 
that  will  at  age  40  insure  $1000,  to  be  paid  to  the  heirs  of 
the  insured  at  the  end  of  any  year  in  which  he  may  die. 

Detailed  Calculation  of  Net  Single  Premiums  for  Whole 
Life  Policies.  —  In  illustration  of  this  subject,  we  will 
assume  that  the  age  of  the  insured  is  50.  The  amount 
insured  is  $1.  The  table  of  mortality  used  is  the  Ameri- 
can Experience,  and  the  rate  of  interest  is  4£  per  cent,  per 
annum,  compounded  yearly.  Opposite  age  50  in  the  fol- 
lowing table,  in  the  column  headed,  "  Value  in  hand  at  age 


NET  PREMIUMS  165 

50,  of  SI,  to  be  paid  certain  at  the  end  of  each  respective  year," 
we  find  the  amount  $0.956938.  This  is  the  amount  that 
at  4|  per  cent,  will  produce  $1  in  one  year,  and  it  is  obtained 
by  dividing  100  by  104£.  This  is  to  be  multiplied  by  the 
number  of  deaths  during  the  year  between  age  50  and  age 
51;  this  number,  as  shown  by  the  mortality  table,  is  962, 
and  it  is  placed  in  the  following  table  opposite  age  50,  in 
the  column  headed,  "Number  of  Deaths."  In  the  next 
column,  which  is  headed,  "Number  living  at  age  50,"  we 
find  the  number  69,804;  this,  too,  is  taken  from  the  table 
of  mortality.  The  product  arising  from  multiplying 
SO  .956938  by  962  is  divided  by  69,804,  and  the  result  is 
$0.013188.  This  is  the  amount  that  at  age  50  will  insure 
$1,  to  be  paid  to  the  heirs  of  the  insured  at  the  end  of  the 
year,  in  case  he  dies  between  age  50  and  age  51. 

Opposite  age  51,  in  the  same  table,  in  the  column  headed, 
"Value  in  hand,  at  age  50,  of  $1,  to  be  paid  certain  at  the 
end  of  each  respective  year,"  we  find  the  amount  $0.915730. 
This  is  the  amount  that  will  produce  $1  certain  in  two  years, 
when  invested  at  4|  per  cent,  per  annum,  compounded 
annually,  and  it  was  obtained  by  multiplying  ^  by 
j^ij.  Multiply  this  by  1001,  which  is  the  number  of  deaths 
between  age  51  and  age  52,  and  divide  the  product  by 
69,804,  which  is  the  number  living  at  age  50,  and  we 
have  $0.013132.  This  is  the  amount  that,  if  paid  in  hand 
at  age  50,  will  insure  $1,  to  be  paid  to  the  heirs  of  the  in- 
sured at  the  end  of  the  second  year,  in  case  the  insured 
dies  in  that  year  —  that  is,  between  age  51  and  age  52. 

In  a  similar  manner,  the  calculations  as  shown  in  the 
table  are  made  each  respective  year  to  include  age  95, 
which  is  the  limit  of  the  table  of  mortality  we  are  now  using, 
and  the  sum  of  all  these  respective  yearly  values  gives  us 
$0.430037.  This  amount,  if  paid  in  hand  at  age  50,  will 
insure  $1  for  whole  life  on  the  data  assumed,  —  namely, 
the  American  Experience  Table  of  Mortality,  and  4|  per 
cent,  per  annum,  compounded  yearly. 

In  an  entirely  similar  manner,  the  calculations  can  be 


166 


YALE  READINGS  IN  INSURANCE 


made  at  any  age  included  in  the  table  of  mortality,  and  at 
any  designated  rate  of  interest. 

Having  found  the  net  single  premium  that  will  insure 
$1  at  any  age,  the  net  single  premium  that  will  insure  any 
other  amount  at  the  same  age  is  found  by  a  simple  propor- 
tion. 

TABLE.  —  ILLUSTRATING  THE  MANNER  OF  CALCULATING  THE  NET 
SINGLE  PREMIUM  FOR  A  WHOLE-LIFE  POLICY  FOR  $1;  ISSUED  AT 
AGE  50  —  AMERICAN  EXPERIENCE,  4£  PER  CENT. 


Age 

Value  in  hand,  at_ 
age  50,  of  $1.00,' 
to  be  paid  certain 
at  the  end  of  each 
respective  year 

Number 
of 
Deaths 

Number 
Living  at 
Age  50 

Value  in  hand  at  age 
50,  of  $1.00,  to  be 
paid  at  the  end  of 
each  respective  year, 
provided  the  insured 
dies  during  the  year 

Age 

50  ... 

$0.956938  X 

962  - 

69,804  = 

$0.013188 

50 

51  ... 

0.915730  X 

1001  - 

69,804  = 

0.013132 

51 

52  ... 

0.876297  X 

1044  - 

69,804  = 

0.013106 

52 

53  ... 

0.838561  X 

1091  - 

69,804  = 

0.013106 

53 

54  ... 

0.802451  X 

1143  - 

69,804  = 

0.013140 

54 

55  ... 

0.767896  X 

1199  - 

69,804  = 

0.013190 

55 

56  ... 

0.734828  X 

1260  - 

69,804  = 

0.013264 

56 

57  ... 

0.703185  X 

1325  - 

69,804  = 

0.013348 

57 

58  ... 

0.672904  X 

1394  - 

69,804  = 

0.013438 

58 

59  ... 

0.643928  X 

1468- 

69,804  = 

0.013542 

59 

60  ... 

0.616199  X 

1546  - 

69,804  = 

0.013647 

60 

61  ... 

0.589664  X 

1628  - 

69,804  = 

0.013752 

61 

62  ... 

0.564272  X 

1713  - 

69,804  = 

0.013847 

62 

63  ... 

0.539973  X 

1800  - 

69,804  = 

0.013924 

63 

64  ... 

0.516720  X 

1889  - 

69,804  = 

0.013983 

64 

65  ... 

0.494469  X 

1980  - 

69,804  = 

0.014026 

65 

66  ... 

0.473176  X 

2070  - 

69,804  = 

0.014032 

66 

67  ... 

0.452800  X 

2158  - 

69,804  = 

0.013998 

67 

68  ... 

0.433302  X 

2243  - 

69,804  = 

0.013923 

68 

69  ... 

0.414643  X 

2321  - 

69,804  = 

0.013787 

69 

70  ... 

0.396787  X 

2391  - 

69,804  = 

0.013591 

70 

71  ... 

0.379701  X 

2448  - 

69,804  - 

0.013316 

71 

72  ... 

0.363350  X 

2487  - 

69,804  = 

0.012946 

72 

73  ... 

0.347703  X 

2505  - 

69,804  = 

0.012478 

73 

74  ... 

0.332731  X 

2501  - 

69,804  - 

0.011921 

74 

NET  PREMIUMS 


167 


75  ... 

0.318402  X 

2476  - 

69,804  = 

0.011294 

75 

76  ... 

0.304691  X 

2431  - 

69,804  = 

0.010611 

76 

77  ... 

0.291571  X 

2369  - 

69,804  = 

0.009895 

77 

78  ... 

0.279015  X 

2291  - 

69,804  = 

0.009157 

78 

79  ... 

0.267000  X 

2196  - 

69,804  - 

0.008400 

79 

80  ... 

0.255502  X 

2091  - 

69,804  = 

0.007654. 

80 

81  ... 

0.244500  X 

1964  - 

69,804  = 

0.006879 

81 

82  ... 

0.233971  X 

1816  - 

69,804  = 

0.006087 

82 

83  ... 

0.223896  X 

1648  - 

69,804  = 

0.005286 

83 

84  ... 

0.214254  X 

1470  - 

69,804  = 

0.004512 

84 

85  ... 

0.205028  X 

1292  - 

69,804  = 

0.003795 

85 

86  ... 

0.196199  X 

1114  - 

69,804  = 

0.003131 

86 

87  ... 

0.187750  X 

933  - 

69,804  = 

0.002509 

87 

88  .  .. 

0.179665  X 

744  - 

69,804  = 

0.001915 

88 

89  ... 

0.171929  X 

555  - 

69,804  = 

0.001367 

89 

90  ... 

0.164525  X 

385  - 

69,804  = 

0.000907 

90 

91  ... 

0.157440  X 

246  - 

69,804  = 

0.000555 

91 

92  ... 

0.150661  X 

137  - 

69,804  = 

0.000296 

92 

93  ... 

0.144173  X 

58  - 

69,804  = 

0.000120 

93 

94  ... 

0.137964  X 

18- 

69,804  = 

0.000036 

94 

95  ... 

0.132023  X 

3  - 

69,804  = 

0.000006 

95 

Total  

$0.430037 

If  the  insurance  is  for  a  limited  number  of  years  only, 
the  calculation  is  made  for  each  year  of  the  term,  and  the 
sum  of  these  yearly  amounts  will  give  the  net  single 
premium  that  will,  if  paid  at  the  time  the  policy  is  issued, 
insure  $1,  to  be  paid  to  the  heirs  of  the  insured  at  the  end 
of  the  year  in  which  the  policy-holder  may  die;  provided 
he  dies  before  the  expiration  of  the  term.  For  instance, 
suppose  the  insurance  at  age  50  is  to  continue  for  ten 
years  only;  take  in  the  above  table  the  amounts  for  the 
first  ten  years,  their  sum  will  be  the  net  single  premium 
required. 

If  insurance  is  paid  for  at  age  50,  to  begin  only  at  the 
end  of  ten  years  from  that  time,  and  then  continue  for 
life;  the  net  single  premium  is  obtained  by  subtracting 
the  amount  that  will  at  age  50  insure  $1  until  age  60  from 
the  amount  that  will  at  age  50  insure  $1  for  life. 


168 


YALE  READINGS  IN  INSURANCE 


If  insurance  is  paid  for  at  age  50  to  begin  at  age  60,  and 
then  continue  for  ten  years  only,  subtract  the  net  single 
premium  that  will  at  age  50  insure  $1,  to  begin  at  age  70 
and  continue  for  life,  from  the  net  single  premium  that  will, 
at  age  50  insure  $1,  to  begin  at  age  60  and  continue  for  life. 

The  net  single  premium  that  will  at  any  age  insure  $1, 
to  be  paid  at  the  end  of  any  designated  year,  provided  the 
insured  dies  in  that  year,  is  found,  as  before  stated,  by 
first  determining  the  amount  that  will  at  the  named  rate 
of  interest  produce  $1  at  the  end  of  the  designated  year, 
and  then  multiplying  this  amount  by  the  fraction  (obtained 
from  the  mortality  table),  which  represents,  at  the  time 
the  insurance  is  effected,  the  chance  that  the  insured  will 
die  in  the  designated  year. 

For  purposes  of  comparison  and  general  illustration,  the 
following  table  is  given,  showing  the  net  single  premiums 
that  will  insure  $1000  for  whole  life,  at  ages  from  20  to 
70  inclusive,  at  4  per  cent. : 

NET  SINGLE  PREMIUMS  —  AMERICAN  EXPERIENCE  —  FOUR  PER  CENT. 


Age 

Premium 

Age 

Premium 

Age 

Premium 

20  .... 

$247.798 

37  .... 

$343.088 

54  .... 

$514.307 

21  .... 

251.846 

38  .... 

351.245 

55  .... 

526.645 

22  .... 

256.076 

39  .... 

359.266 

56  .... 

539.153 

23  .... 

260.472 

40  .... 

367.575 

57  .... 

551.806 

24  .... 

265.042 

41  .... 

376.167 

58  .... 

564.589 

25  .... 

269.704 

42  .... 

385.060 

59  .... 

577.482 

26  .... 

274.737 

43  .... 

394.252 

60  .... 

590.457 

27  .... 

279.872 

44  .... 

403.751 

61  .... 

603.491 

28  .... 

285.207 

45  .... 

413.551 

62  .... 

616.557 

29  .... 

290.754 

46  .... 

423.659 

63  .... 

629.630 

30  .... 

296.514 

47  .... 

434.063 

64  .... 

642.687 

31  .... 

302.497 

48  .... 

444.762 

65  .... 

655.699 

32  .... 

308.713 

49  .... 

455.744 

66  .... 

668.630 

33  .... 

315.167 

50  .... 

467.046^ 

67  .... 

681.452 

34  .... 

321.862 

51  .... 

478.480 

68  .... 

694.137 

35  .... 

328.809 

52  

490.207 

69  .... 

706.647 

36  .... 

336.022 

53  .... 

502.154 

70  .... 

718.960 

NET  PREMIUMS  169 

Net  Annual  Premium  for  Whole-life  Policies.  —  Having 
shown  how  to  calculate  the  net  single  premiums  that  will 
insure  $1  for  whole. life  at  any  age  included  in  the  table 
of  mortality,  it  is  now  proposed  to  see  how  the  exact 
equivalent  can  be  determined  when  the  payments  are  made 
by  instalments  instead  of  by  one  sum  in  advance.  It 
is  usual,  in  ordinary  whole-life  policies,  for  the  companies 
to  charge,  and  the  insured  to  pay,  equal  annual  premiums, 
the  first  in  advance,  and  one  at  the  beginning  of  each 
following  year,  as  long  as  the  insured  is  alive.  When  the 
net  single  premium  at  any  age  has  been  accurately  cal- 
culated, the  question  arises,  What  is  the  net  annual 
premium,  under  the  conditions  just  named,  that  will 
be  the  precise  equivalent  of  this  net  single  premium  at 
the  time  the  policy  issued? 

When  this  net  annual  premium  is  accurately  determined, 
it  being  the  precise  money  equivalent  of  the  net  single 
premium,  and  the  net  single  premium  being  just  sufficient, 
on  the  data  designated,  to  effect  the  insurance,  it  follows 
that  its  precise  equivalent,  paid  in  equal  annual  premiums, 
will  also  be  just  sufficient  to  effect  the  insurance. 

To  solve  this  problem,  first  find  the  value,  at  any  named 
age,  of  a  whole-life  series  of  annual  premiums  of  $1  each, 
the  condition  being  that  the  first  payment  of  $1  is  to 
be  made  at  the  time  the  policy  is  issued,  and  that  $1  is 
to  be  paid  at  the  beginning  of  each  following  year,  as  long 
as  the  person  is  alive  to  make  the  payment.  When  this 
is  done,  the  problem  we  wish  to  solve  becomes  simple, 
because,  after  we  have  found,  at  any  named  age,  the  value 
in  hand  of  this  life  series  of  premiums  of  $1  each,  this 
amount  will  be  to  the  net  single  premium  at  that  age  as  $1 
is  to  the  annual  premium  required.  We  will  use  the  Ameri- 
can Experience  Table  of  Mortality  and  4^  per  cent,  in- 
terest. 

The  first  thing,  then,  is  to  find  the  value  at  any  age  — 
say  50  —  of  a  life  series  of  annual  premiums  of  $1  each,  the 
first  to  be  paid  in  advance,  and  $1  to  be  paid  at  the  begin- 


170  YALE  READINGS  IN  INSURANCE 

ning  of  each  following  year,  as  long  as  the  insured  is  alive 
to  make  the  payments. 

The  first  annual  payment  is  to  be  made  in  hand,  and  its 
value,  at  the  time  the  policy  is  issued,  is  $1.  The  value 
in  hand  of  $1,  to  be  paid  at  the  end  of  one  year,  interest 
being  4£  per  cent,  per  annum,  is  100  divided  by  104£; 
but  this  second  payment  is  not  to  be  made  certain,  but 
only  on  condition  that  the  insured,  aged  50,  will  be  alive 
at  age  51.  The  fraction  which,  at  age  50,  represents  the 
chance  that  the  insured  will  be  alive  at  age  51  is  equal 
to  the  number  living  at  age  51  divided  by  the  number 
living  at  age  50.  From  the  table  of  mortality,  we  find  the 
number  living  at  age  51  is  68,824,  and  the  number  living 
at  age  50  is  69,804.  The  fraction  in  this  case  is  therefore 
if  Iff-  The  value,  at  age  50,  of  this  second  payment  of 
$1  to  be  made  at  age  51,  in  case  the  insured  is  alive  to  make 
the  payment,  is  equal  to  y-^  X  Hj^.  In  like  manner, 
the  value  of  the  third  payment,  which  is  to  be  made  at 
the  end  of  two  years,  in  case  the  insured  is  alive  at  that 
time  to  make  the  payment,  is  equal  to  j^g  X  j-^,  multi- 
plied by  the  fraction  which,  at  age  50,  represents  the 
chance  at  that  time  that  the  insured  will  be  alive  at  age 
52  to  make  the  third  payment.  This  fraction  is  equal  to 
the  number  living  at  52  divided  by  the  number  living  at 
50,  which  we  see,  from  the  table  of  mortality,  is  59  Mi  5 
therefore  the  value  in  hand,  at  age  50,  of  the  third  payment 
of  $1,  to  be  paid  only  on  condition  that  the  insured  is 
alive  at  age  52,  is  expressed  by  ^  X  jj^  X 


In  a  manner  entirely  similar,  we  can  calculate  at  age  50 
the  value  in  hand  of  the  fourth  and  every  payment  of  the 
whole-life  series  to  the  limit  of  the  table.  This  has  been 
done,  and  the  sum  of  the  respective  values  in  hand,  at  age 
50,  of  the  whole-life  series  of  annual  premiums  of  $1  each, 
is  found  to  be  $13.235802. 


NET  PREMIUMS 


171 


TABLE.  —  ILLUSTRATING  THE  MANNER  OP  CALCULATING  THE  VALUE, 
AT  AGE  50,  OF  A  WHOLE-LIFE  SERIES  OF  ANNUAL  PAYMENTS  OP 
$1  EACH  —  THE  FIRST  PAYMENT  TO  BE  MADE  IN  HAND,  AND  ONE 
AT  THE  BEGINNING  OF  EACH  FOLLOWING  YEAR,  AS  LONG  AS  THE 
PERSON  is  ALIVE  TO  MAKE  THE  PAYMENT.  AMERICAN  EXPERI- 
ENCE —  4  \  PER  CENT. 


Age 

Value  in  hand,  at 
age  50,  of  $1.00, 
to  be  paid  certain 
at  the  beginning  of 
each  year 

Number 
living  at 
beginning 
of  each 
year 
Numerator 

Number 
living  at 
age  50 
Denominator 

Value  in  hand  at  age 
50,  of  $1.00,  to  be 
paid  at  the   begin- 
ning of  each  respec- 
tive year,  provided 
the  person  is  alive  to 
make  the  payment 

Age 

50   ... 

$1.000000  X 

69,804  - 

69,804  = 

$1.000000 

50 

51    ... 

0.956938  X 

68,842  - 

69,804  = 

0.943750 

51 

52   ... 

0.915730  X 

67,841  - 

69,804  = 

0.889978 

52 

53   ... 

0.876297  X 

66,797  - 

69,804  = 

0.838548 

53 

54  ... 

0.838561  X 

65,706  - 

69,804  = 

0.789331 

54 

55  ... 

0.802451  X 

64,563  - 

69,804  = 

0.742202 

55 

56  ... 

0.767896  X 

63,364  - 

69,804  = 

0.697051 

56 

57  ... 

0.734828  X 

62,104  - 

69,804  = 

0.653770 

57 

58  ... 

0.703185  X 

60,779  - 

69,804  = 

0.612270 

58 

59  ... 

0.672904  X 

59,385  - 

69,804  = 

0.572466 

59 

60  ... 

0.643928  X 

57,917  - 

69,804  = 

0.534273 

60 

61  ... 

0.616199  X 

56,371  - 

69,804  = 

0.497619 

61 

62  ... 

0.589664  X 

54,743  - 

69,804  =» 

0.462437 

62 

63  ... 

0.564272  X 

53,030  - 

69,804  = 

0.428677 

63 

64  ..  . 

0.539973  X 

51,230  - 

69,804  - 

0.396293 

64 

65  ... 

0.516720  X 

49,341  - 

69,804  = 

0.365244 

65 

66  ... 

0.494469  X 

47,361  - 

69,804  = 

0.335490 

66 

67  ... 

0.473176  X 

45,291  - 

69,804  = 

0.307011 

67 

68  ... 

0.452800  X 

43,133  - 

69,804  = 

0.279792 

68 

69  ... 

0.433302  X 

40,890  - 

69,804  = 

0.253821 

69 

70  ... 

0.414643  X 

38,569  - 

69,804  = 

0.229104 

70 

71  ... 

0.396787  X 

36,178  - 

69,804  = 

0.205647 

71 

72  ... 

0.379701  X 

33,730  - 

69,804  - 

0.183475 

72 

73  ... 

0.363350  X 

31,243  - 

69,804  = 

0.162629 

73 

74  ... 

0.347703  X 

28,738  - 

69,804  = 

0.143148 

74 

75  ... 

0.332731  X 

26,237  - 

69,804  = 

0.125063 

75 

76  ... 

0.318402  X 

23,761  - 

69,804  = 

0.108383 

76 

77  ... 

0.304691  X 

21,330  - 

69,804  = 

0.093104 

77 

78  ... 

0.291571  X 

18,961  - 

69,804  = 

0.079200 

78 

79  ... 

0.279015  X 

16,670  - 

69,804  - 

0.066632 

79 

172 


YALE  READINGS  IN  INSURANCE 


TABLE  —  Continued 


Age 

Value  in  hand,  at 
age    50,  of    $1.00 
to  be  paid  certain 
at  the  beginning  of 
each  year 

Number 
living  at 
beginning 
of  each 
year 
Numerator 

Number 
living  at 
age  50 
Denominator 

Value  in  hand  at  age 
50,  of  $1.00,  to  be 
paid  at    the    begin- 
ning of  each  respec- 
tive year,  provided 
the  person  is  alive  to 
make  the  payment 

Age 

80   ... 

0.267000  X 

14,474  - 

69,804  = 

0.055363 

80 

81    ... 

0.255502  X 

12,383  - 

69,804  = 

0.045325 

81 

82  ... 

0.244500  X 

10,419  - 

69,804  - 

0.036494 

82 

83  ... 

0.233971  X 

8,603  - 

69,804  = 

0.028836 

83 

84  ... 

0.223896  X 

6,955  - 

69,804  = 

0.022308 

84 

85  ... 

0.214254  X 

5,485  - 

69,804  = 

0.016835 

85 

86  ... 

0.205028  X 

4,193  - 

69,804  = 

0.012316 

86 

87  ... 

0.196199  X 

3,079  - 

69,804  = 

0.008654 

87 

88  ... 

0.187750  X 

2,146  - 

69,804  - 

0.005772 

88 

89  ... 

0.179665  X 

1,402  - 

69,804  = 

0.003609 

89 

90  ... 

0.171929  X 

847  - 

69,804  - 

0.002086 

90 

91  ... 

0.164525  X 

462  - 

69,804  = 

0.001089 

91 

92  ... 

0.157440  X 

216  - 

69,804  = 

0.000487 

92 

93  ... 

0.150661  X 

79  - 

69,804  = 

0.000171 

93 

94  ... 

0.144173  X 

21  - 

69,804  = 

0.000043 

94 

95  ... 

0.137964  X 

3  - 

69,804  = 

0.000006 

95 

Total $13.235802 


NOTE.  —  The  remarks  that  follow  the  table  illustrating  the  calcula- 
tion of  the  net  single  premium  that  will  insure  $1  for  life  apply  to  the 
value,  at  any  age,  of  a  series  of  annual  payments  of  $1  for  a  designated 
term  of  years. 

Having  shown,  in  the  foregoing  table,  how  we  calculate 
the  value,  at  age  50,  of  a  whole-life  series  of  annual  premi- 
ums of  $1  each,  attention  is  called  to  the  fact  that  the  cal- 
culation of  the  net  value  at  any  other  age  of  a  similar 
series  of  premiums  can  be  made,  in  a  like  manner,  from 
any  table  of  mortality,  and  at  any  rate  of  interest. 


NET  PREMIUMS 


173 


VALUE  AT  DIFFERENT  AGES  OF  A  LIFE  SERIES  OF  ANNUAL  PAYMENTS 
OF  $1  EACH  —  AMERICAN  EXPERIENCE  TABLE  OF  MORTALITY  — 
4  PER  CENT.  INTEREST. 


Age 

Value 

Age 

Value 

Age 

Value 

20  ... 

$19.5579 

37  ... 

$17.0691 

54  ... 

$12.6280 

21  ... 

19.4520 

38  ... 

16.8676 

55  ... 

12.3072 

22  ... 

19.3420 

39  ... 

16.6591 

56  ... 

11.9820 

23  ... 

19.2277 

40  ... 

16.4431 

57  ... 

11.6530 

24  ... 

19.1089 

41  ... 

16.2196 

58  ... 

11.3207 

25  ... 

18.9854 

42  ... 

15.9884 

59  ... 

10.9855 

26  ... 

18.8568 

43  ... 

15.7494 

60  ... 

10.6481 

27  ... 

18.7233 

44  ... 

15.5025 

61  ... 

10.3092 

28  ... 

18.5846 

45  ... 

15.2477 

62  ... 

9.9695 

29  ... 

18.4404 

46  ... 

14.9849 

63  ... 

9.6296 

30  ... 

18.2906 

47  ... 

14.7144 

64  ... 

9.2901 

31  ... 

18.1351 

48  ... 

14.4362 

65  ... 

8.9518 

32  ... 

17.9735 

49  ... 

14.1507 

66  ... 

8.6156 

33  ... 

17.8056 

50  ... 

13.8583 

67  ... 

8.2822 

34  ... 

17.6316 

51  ... 

13.5595 

68  ... 

7.9524 

35  ... 

17.4510 

52  ... 

13.2546 

69  ... 

7.6272 

36  ... 

17.2634 

53  .  .. 

12.9440 

70  ... 

7.3070 

To  obtain  the  net  annual  premium.  —  When  the  net 
single  premium  that  will  insure  $1  for  whole  life  has 
been  calculated,  and  the  value  at  the  designated  age  of  a 
whole-life  series  of  annual  payments  of  $1  each  is  known, 
we  obtain  the  net  annual  premium  that  will  insure  $1  for 
whole  life  at  that  age  by  the  following  rule:  Divide  the 
net  single  premium  at  any  age  by  the  value  at  that  age 
of  a  whole-life  series  of  annual  payments  of  $1  each,  and 
the  result  is  the  net  annual  premium  that  will  insure  $1 
for  whole  life  at  that  age.  For  instance  (American  Expe- 
rience, 4|  per  cent.),  at  age  30,  the  net  single  premium  to 
insure  $1  is  $0.262609,  the  value  at  age  30  of  the  series 
of  $1  premiums  is  $17.1238,  therefore  we  have  the  pro- 
portion: $17.1238  :  $0.262609  ::  $1  is  to  the  net  annual 
premium  that  at  age  30  will  insure  $1  for  whole  life. 


174 


YALE  READINGS  IN  INSURANCE 


NOTE.  —  It  follows,  too,  from  this  general  reasoning,  that  if  it  is 
desired  to  convert  the  net  single  premium  into  a  limited  number  of 
animal  premiums,  or  equal  instalments,  for  a  specified  number  of 
years,  we  first  find  the  value  at  the  age  in  question  of  a  series  of  an- 
nual payments  of  $1  each  for  the  designated  term  of  years,  and  divide 
the  net  single  premium  by  this  value. 

The  following  table  shows  the  net  annual  premiums 
that  will  insure  $1000  at  different  ages,  from  20  to  70 
inclusive : 

NET  ANNUAL  PREMIUMS  —  AMERICAN  EXPERIENCE  —  4  PER  CENT. 


Age 

Premium 

Age 

Premium 

Age 

Premium 

20  

$12.669 

37  .... 

$20.124 

54  .... 

$40.728 

21  .... 

12.947 

38  .... 

20.824 

55  .... 

42.792 

22  .... 

13.239 

39  .... 

21.566 

56  .... 

44.997 

23  .... 

13.547 

40  .... 

22.354 

57  .... 

47.353 

24  .... 

13.870 

41  

23.192 

58  .... 

49.872 

25  

14.211 

42  

24.084 

59  .... 

52.568 

26  .... 

14.570 

43  .... 

24.988 

60  .... 

55.452 

27  .... 

14.948 

44  .... 

26.044 

61  .... 

58.539 

28  .... 

15.346 

45  .... 

27.122 

62  .... 

61.844 

29  .... 

15.767 

46  .... 

28.273 

63  .... 

65.385 

30  .... 

16.211 

47  .... 

29.499 

64  .... 

69.180 

31  .... 

16.680 

48  .... 

30.809 

65  .... 

73.248 

32  .... 

17.176 

49  .... 

32.207 

66  .... 

77.607 

33  .... 

17.700 

50  .... 

33.698 

67  .... 

82.279 

34  .... 

18.255 

51  .... 

35.288 

68  .... 

87.286 

35  .... 

18.842 

52  .... 

36.984 

69  .... 

92.649 

36  .... 

19.464 

53  .... 

38.794 

70  .... 

98.393 

CHAPTER  XII 

PROVISION   FOR  EXPENSES1 

THE  more  difficult  problems  of  a  science  or  art  are 
naturally  the  last  to  be  solved.  The  relations  of  interest 
and  mortality  to  life  insurance  are  comparatively  simple 
factors,  and  well  developed.  But  when  we  descend  from 
the  exact  reasoning  of  these  more  exclusively  mathematical 
subjects  to  the  division  of  expenses,  we  encounter  a  con- 
fusion which  makes  it  difficult  to  select  and  arrange  a 
sufficient  amount  of  controlling  data  for  a  basis  upon  which 
to  erect  a  symmetrical  structure  for  practical  operations. 

Too  generally,  when  attempts  have  been  made  to  con- 
struct a  scheme  for  distributing  expenses,  the  actual  con- 
ditions imposed  by  competition  and  experience  have 
been  ignored  with  a  vague  hope  that  theoretical  considera- 
tions might  in  some  degree  be  made  to  govern  custom. 
Or  they  have  been  restricted  to  too  few  elements  of 
expense  in  an  endeavor  to  minimize  the  labor  of  computa- 
tions. While  both  of  these  considerations  are  entitled  to 
recognition,  they  should  not  be  allowed  to  handicap  the 
search  for  a  solution,  by  substituting  deductions  for  in- 
ductions. At  the  bottom  of  the  subject  must  be  laid  a 
fundamental  classification  of  expenses  themselves,  derived 
from  companies'  financial  statements. 

It  will  aid  us  to  summarize  the  discussions  which  have 
appeared.  The  original  net  premium  seems  to  have  been 
loaded  by  a  constant  percentage  of  itself  to  meet  expenses 
and  general  contingencies;  the  latter,  because  the  rates 

1  By  William  D.  Whiting.  Reprinted  from  pages  214-219,  Volume 
V,  "Transactions  of  the  Actuarial  Society  of  America." 

175 


176  YALE  READINGS  IN  INSURANCE 

of  interest  and  mortality  were  considered  more  liable  to 
fluctuation  than  are  now  feared  by  well-regulated  com- 
panies. At  present  the  assumed  (3  per  cent.)  rate  of  inter- 
est is  theoretically  fixed  low  enough  to  cover  the  expenses 
and  losses  due  to  investments,  and  the  assumed  rate  of 
mortality  high  enough  to  cover  all  contingencies  due  to 
the  probability  of  dying,  thus  leaving  the  loading  on  pre- 
miums and  discontinuance  gains  free  to  cover  all  other 
expenses  without  specification. 

Finally  a  valuable  suggestion  came  from  Great  Britain 
to  the  effect  that,  as  the  gross  premium  was  irrevocably 
confined  by  competition  to  a  uniform  amount  for  each 
policy  year,  while  the  expenses  of  the  first  year  from  the 
same  cause  were  irrevocably  much  greater  than  for  any 
of  its  successors,  the  first  year  should  be  treated  as  term 
insurance,  so  as  to  obtain  a  larger  loading  therein  by 
releasing  it  from  the  obligation  of  accumulating  any 
reserve.  Modifications  of  this  idea  have  appeared  by 
attaching  liens  to  the  policy  equal  to  the  first  year's  ter- 
minal reserve  as  additional  first  year's  premium,  leaving 
the  character  of  the  insurance  undisturbed. 

Although  much  has  been  written  and  said  on  the  subject 
of  providing  for  and  assessing  expenses,  but  little  progress 
has  been  made,  and  it  remains  in  so  unsatisfactory  a  con- 
dition that  an  attempt,  by  another  method,  to  contribute 
to  its  solution  should  be  tried.  I  apprehend  that  a  scrutiny 
of  companies'  statements  will  disclose  five  distinct  kinds 
of  expenses,  which  are  independent  and  cannot  be  greatly 
modified,  to  wit : 

1.  New  Business;  consisting  of  examination  fees,  agents' 
first-year  commissions,  and  advertising,  printing,  salaries, 
etc.,  incurred  in  getting  new  business;  say,  80  per  cent,  of 
first  year's  premiums. 

2.  Collection;   consisting    of    agents'   renewal  commis- 
sions, collection  fees,  exchange,  taxes  on  premiums,  etc.; 
say  10  per  cent,  on  renewal  premiums. 

3.  Settlement;  consisting  of  the  expense  of  investiga- 


PROVISION  FOR  EXPENSES  177 

ting  and  resisting  death  claims;  say  1£  per  cent,  of  face  of 
death  claims. 

4.  Investments;   cost  of  making,  handling,  and  protect- 
ing same,  bad  debts,  losses  over  gains,  taxes  and  repairs 
on  assets;   say,  one-half  of  1  per  cent,  per  annum. 

5.  General;    all  other  expenses,   particularly  those  of 
general  supervision,  actuarial  and  clerical;    say,  $1  per 
$1000  of  insurance  annually. 

How  shall  we  provide  for  these  necessary  and  independ- 
ent expenses  so  as  to  charge  them  equitably  upon  each 
class  of  policies  in  proportion  as  they  cause  them,  main- 
tain consistency  in  computing  reserves,  surrender  values, 
and  dividends,  and  yet  make  no  serious  departure  from 
present  level  office  rates,  without  so  complicating  our 
processes  as  to  render  them  unworkable? 

The  first  expense  item  —  for  new  business  —  should 
be  met  during  the  first  year  by  each  class  of  new  entrants 
for  themselves,  so  as  to  avoid  a  loss  to  persistent  members 
being  occasioned  by  the  lapsing  or  death  of  one  in  arrears. 
The  old  members  have  built  up  the  company  at  consider- 
able cost  to  themselves  and  own  it.  It  is  unjust  that  new 
members  should  be  allowed  to  participate  in  the  benefits 
of  an  established  plant  without  at  least  paying  their  own 
cost  of  entrance.  It  would  be  more  proper,  indeed  they 
should  be  charged  a  bonus  for  the  privilege  of  entering, 
to  go  to  the  old  members  in  reimbursements  of  their  early 
excess  of  expenses  in  establishing  the  institution.  Old 
members  should  not  need  the  new  under  a  proper  arrange- 
ment for  future  expenses;  and  any  scheme  which  is  not 
mathematically  self-sustaining,  until  the  last  risk  is  dis- 
posed of,  and  requires  "new  blood"  to  support  it,  is  in- 
solvent by  confession. 

It  is  true  that  the  old  members,  left  to  themselves,  will 
gradually  diminish  in  numbers  and  a  certain  class  of  ex- 
penses will  proportionately  increase  thereby.  Some  arrange- 
ment among  themselves  must  be  made  for  this,  and  will 
be  treated  of  later  under  item  5  of  general  expenses.  The 


178  YALE  READINGS  IN  INSURANCE 

present  contention  is  that  each  body  of  policy-holders  must 
be  wholly  self-sustaining,  as  to  mortality,  interest  and 
expenses,  in  order  to  work  out  a  solvent  scheme;  and  the 
fallacy  of  "new  blood,"  which  has  been  the  excuse  for  so 
much  extravagance  and  inequity,  should  be  utterly  aban- 
doned. But  how  can  the  new  entrant  be  made  to  pay 
the  expenses  incurred  on  his  account  during  the  first  year, 
within  that  year?  Ruling  out  the  possibility  of  returning 
to  the  small  initial  expenses  of  twenty-five  years  ago,  or  of 
exacting  a  sufficient  cash  initiation  fee,  two  methods  are 
proposed : 

First,  subject  the  insurance  to  an  interest-bearing  note 
or  lien  equal  to  the  extraordinary  expenses  of  the  first 
year,  but  not  exceeding  the  terminal  reserve  of  that  year. 
The  effect  of  this  is  the  same  as  an  initiation  fee,  not 
subject  to  agents'  commissions.  But  it  works  awkwardly 
in  so  far  as  the  sum  payable  as  a  claim  is  diminished  by 
the  lien  if  not  canceled  by  dividends;  and  the  interest 
continues  payable  annually  after  "limited  premiums" 
have  ceased.  To  avoid  this  it  has  been  suggested  that  the 
lien  be  converted  into  an  annuity  in  favor  of  the  company, 
for  the  same  term  that  the  premiums  run;  and  be  counted 
as  a  diminishing  asset  or  lien  against  surrender  values. 
Neither  of  these  forms,  although  mathematically  sound, 
would  be  apt  to  be  well  received  by  insurance  depart- 
ments; and  the  notes  or  annuity  liens  (besides  imposing 
considerable  clerical  labor)  would  run  the  risk  of  being 
disallowed  as  assets,  notwithstanding  being  made  so  by 
the  expressed  terms  of  the  contract. 

Second,  make  the  first  year's  insurance  a  preliminary 
one-year  term  risk,  the  permanent  insurance  to  commence 
one  year  after  the  date  of  the  policy  at  the  premium  rate 
for  the  then  increased  age.  This  method  has  come  spon- 
taneously into  use  on  both  sides  of  the  Atlantic  within  a 
few  years,  on  account  of  the  necessities  of  the  younger 
companies  under  the  pressure  of  competition,  and  has 
proved  successful  with  agents.  It  has  the  recommenda- 


PROVISION  FOR  EXPENSES  179 

tion  of  high  actuarial  authorities,  and  no  refusal  to  recog- 
nize it  has  yet  appeared  from  state  officials  where  the 
terms  of  the  contract  were  stated  so  that  the  policy-holder 
could  know  the  exact  character  of  the  insurance  he  was 
purchasing.  This  method  of  releasing  the  first  year's 
premium  from  the  obligation  of  a  terminal  reserve  allows 
it  to  be  wholly  employed  in  meeting  the  heavy  expenses 
and  light  mortality  of  this  period,  which  should  be  con- 
fined strictly  within  this  limit.  This  method  works  least 
advantageously  on  short,  limited  payment  plans,  as  the 
permanent  premium  is  not  only  based  upon  one  year  of 
age  higher  than  entry,  but  the  number  of  limited  payments 
is  lessened  by  one  year. 

With  the  new  business  made  self-sustaining,  in  its  first 
year,  the  renewal  premiums  need  only  be  burdened  (item  2) 
with  the  expense  of  their  collection  and  renewal  commis- 
sions to  agents.  This,  with  an  allowance  for  taxes  on 
premiums  and  occasional  loss  by  misappropriation,  is 
easily  covered  by  an  average  loading  of  10  per  cent,  added 
to  the  net  premiums,  which  in  the  proposed  distribution 
of  expenses  constitutes  the  only  loading  imposed  upon  the 
net  premium.  This  readily  permits  the  use  of  3  per  cent, 
as  a  basis  for  computing  net  premiums  without  exceeding 
materially  the  office  rates  now  in  use,  except  in  the  case 
of  short  limited  payments  as  before  mentioned. 

The  third  item  (settlement)  of  expense  only  occurs 
upon  death  claims,  and  a  ready  method  for  its  provision 
may  also  be  employed  to  correct  a  glaring  defect  in  our 
present  practice.  Our  computations  of  net  premiums  and 
reserves  are  made  upon  the  incorrect  assumption  that 
death  occurs  at  the  end  of  the  policy  year,  whereas  claims 
are  actually  paid,  on  an  average,  about  the  seventh  month 
and  five  months'  interest  on  the  face  of  the  claim  is  lost 
to  the  company.  This  should  be  altered  and  death  as- 
sumed to  take  place  at  the  beginning  of  the  policy  year 
immediately  after  the  premium  is  due.  We  would  thus 
gain  seven  months'  interest  —  about  $17.50  per  $1000  of 


180  YALE  READINGS  IN  INSURANCE 

claim  —  which  would  easily  cover  the  expenses  of  investi- 
gation, litigation,  and  settlement  in  question.  .  .  .  The 
result  would  be  an  increase  in  all  premiums  and  reserves, 
except  endowments,  of  just  3  per  cent,  when  the  basis 
of  3  per  cent,  interest  is  employed.  On  endowments  the 
increase  would  be  only  3  per  cent,  of  the  term  insurance 
portion  thereof. 

The  fourth  item  of  expenses  exclusively  concerns  the 
care  and  investment  of  assets,  including  incidental  losses 
and  taxes  and  repairs  on  real  estate.  A  small  amount 
should  be  included  for  the  time  and  expenses  of  officers 
and  clerks  employed  in  this  branch  of  the  business.  This 
item  is  easily  and  naturally  provided  for  out  of  the  gross 
interest  and  rents  earned  on  total  assets,  by  assuming  a 
lower  rate  of  interest  for  computing  net  premiums  and 
reserves.  Thus,  if  3^  per  cent,  is  the  maximum  gross  rate 
which  can  be  safely  relied  upon  during  a  period  of,  say, 
thirty  years  to  come,  the  net  rate  employed  would  be  about 
3  per  cent.,  leaving  a  margin  of  J  per  cent,  to  cover  the 
various  expenses  included  under  item  4.  There  is  a  gen- 
eral agreement  among  actuaries  concerning  the  propriety 
of  this  arrangement. 

The  residual  item  (5)  is  for  general  expenses  which  run 
with  the  entire  duration  of  the  policy.  For  this  reason  it 
cannot  be  loaded  upon  the  premium  (as  was  item  2)  with- 
out establishing  a  new  and  burdensome  side  computation 
for  future  general  expense  reserves;  as  the  premiums  on 
a  considerable  portion  of  business  stop  short  of  the  term 
of  the  insurance,  and  as  this  general  expense  (referred  to 
in  discussing  new  business,  item  1),  should  increase  some- 
what as  the  original  number  of  policies  of  its  class  diminish 
by  maturity.  That  portion  of  diminution  which  is  occa- 
sioned by  lapsing  should  be  offset  by  a  surrender  charge, 
and  will  be  discussed  later.  Neither  can  item  5  be 
levied  against  the  interest  earnings  of  the  reserve  (as 
was  item  4),  because  short-term  insurance  only  has  a 
nominal  and  erratic  reserve,  while  reserves  generally  vary 


PROVISION  FOR  EXPENSES  181 

widely  with  the  kind  of  insurance  and  usually  increase 
rapidly. 

We  must  therefore  search  for  some  basis  which  runs 
with  the  term  of  insurance  increasing  slightly,  and  yet  may 
be  easily  handled  as  a  measure  for  these  small  general 
expenses.  The  annual  cost  of  insurance  1  offers  such  a 
basis,  and  has  been  warmly  advocated  for  a  much  larger 
role  in  the  distribution  of  expenses  on  account  of  its  sup- 
posed equity,  as  already  mentioned.  By  adding  about 
10  per  cent,  to  a  true  qx  we  would  derive  an  additional 
annual  cost  of  insurance,  slightly  increasing,  but  averaging 
about  $1  per  $1000  of  insurance.  Experience  shows  that 
this  10  per  cent,  is  just  about  the  difference  between  actual 
mortality  and  that  expected  under  the  Combined  Experi- 
ence (17  office)  tables  generally  used  in  the  United  States, 
excluding  first  year's  mortality.  In  other  words,  the 
mortality  tables  now  in  use  may  be  considered  to  be  equal 
to  actual  experience  already  loaded  10  per  cent,  so  as  to 
provide  the  extra  "cost  of  insurance"  necessary  to  meet 
these  general  expenses  of  item  5.  Here,  again,  there  is 
no  occasion  for  alteration  of  present  custom. 

1  The  cost  of  insurance  for  the  year  is  determined  as  follows:  At  age 
56  the  amount  at  risk  on  an  ordinary  life  policy  in  the  first  year  of 
insurance  is  $970.10.  Of  the  100,000  people  starting  in  the  hypo- 
thetical company  at  age  10,  63,364  survive  at  56.  Of  these,  1260 
will  die  during  the  year,  making  the  net  loss  1260  times  $970.10  or 
$1,222,326,  which  is  the  total  cost  of  insurance  for  the  year.  Divid- 
ing this  amount  by  63,364,  the  number  living  at  the  beginning  of  the 
year,  we  obtain  $19.29,  which  is  the  pro  rata  cost  of  insurance  per 
$1000  for  the  first  year.  In  the  fifth  year  of  insurance  taken  at 
age  56  the  amount  at  risk  is  $849.67,  and  multiplying  this  by  1546, 
the  number  of  deaths,  we  get  $1,313,589.82  as  the  total  cost  of 
insurance  for  the  year.  Dividing  by  57,917,  the  number  living  at 
the  beginning  of  the  year,  we  obtain  $22.68  as  the  cost  of  insurance 
per  $1000,  in  the  fifth  year.  At  90  the  amount  at  risk  is  $127.82 
and  the  total  cost  of  insurance  is  that  sum  multiplied  by  385  or 
$49,210.70.  Dividing  by  847,  the  number  living  at  the  beginning 
of  the  year,  we  obtain  $58.10  as  the  cost  of  insurance  per  $1000  in 
the  thirty-fifth  year  of  insurance.  (Editor.) 


182  YALE  READINGS    IN  INSURANCE 

Thus,  starting  from  practical  conditions,  a  simple, 
consistent,  and  equitable  theory  for  the  provision  and 
distribution  of  expenses  as  they  actually  exist,  may  be 
constructed,  which  will  permit  a  company  to  go  to  a  3 
per  cent,  basis  for  reserves  and  net  premiums,  without 
material  alteration  in  present  office  rates,  and  which  adds 
nothing  to  the  ordinary  labor  of  computations. 


CHAPTER  XIII 


RESERVE1 

THIS  fund  has  by  high  authority  been  well  styled  "the 
great  sheet-anchor  of  life  insurance."  By  referring  to  the 
table  of  net  single  premiums  (page  168),  it  will  be  seen  that 
by  the  American  Experience  Table  of  Mortality,  and  4| 
per  cent,  interest,  the  net  single  premium  that  will  insure 
$1000  for  whole  life,  at  age  20,  is  $217.448.  At  age  21 
the  net  single  premium  is  $221.155.  The  latter  sum  is  the 
net  amount  that  must  be  charged  by  the  company  in  order 
to  insure  a  person  who  is  21  years  old.  This  is  the  sum 
that  the  company  must  hold  at  the  end  of  the  first  year, 
upon  the  policy  issued  at  20,  after  paying  the  net  cost  of 
insurance  for  the  year.  The  net  single  premium  $217.448 
paid  at  age  20  will,  when  increased  by  net  interest  for  one 
year,  furnish  the  required  contribution  of  this  policy  to  pay 
death  claims,  and  leave  in  the  hands  of  the  company  the 
net  single  premium  necessary  to  effect  the  insurance  for 
whole  life  at  age  21,  in  case  death  does  not  occur  before. 

At  the  end  of  the  second  policy  year,  when  the  policy- 
holder  will  be  22  years  old,  the  net  single  premium  that 
will  then  insure  $1000  for  whole  life  is  $225.019,  and  this 
is  the  amount  that  must  then  be  held  by  the  company  to 
the  credit  of  this  policy,  if  the  insured  is  still  alive.  In 
like  manner,  each  successive  year,  if  the  policy-holder  sur- 
vives, the  company  must  have,  in  order  to  comply  with 
its  contract,  an  amount  on  hand  to  the  credit  of  this  policy 
equal  to  the  net  single  premium  that  will  at  the  age  the 

1  By  Gustavus  W.  Smith.  Reprinted  from  pages  42-47  of  "Notes 
on  Life  Insurance";  S.  W.  Green.  New  York,  1875. 

183 


184  YALE  READINGS  IN  INSURANCE 

policy-holder  has  attained  be  sufficient  to  effect  the  in- 
surance. 

Deposit  or  "reserve"  in  case  a  policy  is  paid  for  by  equal 
annual  premiums.  —  From  the  table  it  is  seen  that  at 
age  42  the  net  annual  premium  that  will  insure  $1000  for 
whole  life  (Actuaries'  4  per  cent.)  is  $25.554.  This  pre- 
mium is  to  be  paid  at  the  beginning  of  each  year,  as  long 
as  the  person  is  alive  to  make  the  payment.  At  the  end 
of  the  first  year,  or  beginning  of  the  second  —  supposing 
the  insured  to  be  alive  —  he  pays  the  net  annual  premium, 
$25.554,  and  is  insured  for  another  year;  but  he  is  now 
43  years  old,  and  $26.585  is  the  net  annual  premium  re- 
quired to  insure  $1000  for  life  at  age  43. 

Why  is  it  that  the  man  who  was  insured  at  age  42,  and 
who  has  been  insured  one  year,  and  has  paid  for  that  in- 
surance, can,  at  43  years  of  age,  be  insured  by  the  company 
for  a  less  premium  than  is  required  to  insure  a  man  of  the 
same  age,  43,  but  who  now  takes  out  a  policy  for  the  first 
time  in  that  company?  Taking,  for  further  illustration,  a 
still  greater  age,  we  find  that  at  age  65  the  net  annual 
premium  that  will  insure  $1000  for  life  is  $74.718;  and  yet 
the  person  who  took  out  his  policy  at  age  42,  supposing 
he  is  still  alive,  can  be  safely  insured  at  age  65  by  the  com- 
pany for  a  net  annual  premium  of  $25.554. 

How  is  this?  Why  is  it  that  a  man  65  years  of  age  can 
be  insured  safely  by  a  company  for  a  net  annual  premium 
of  $25.554,  and  another  man  of  the  same  age,  probably  in 
better  health,  because  he  has  just  passed  a  medical  exami- 
nation, can  not  be  safely  insured  by  the  company  for  a  less 
net  annual  premium  than  $74.718  ? 

The  net  annual  premium  is  calculated  to  provide  against 
all  the  probabilities  and  risks  of  the  insured  dying  in  any 
year,  and  of  his  policy  becoming  due;  and  also  the  risk  of 
his  being  alive,  from  year  to  year,  to  pay  his  annual  pre- 
mium. At  the  end  of  each  year,  after  the  net  annual 
premium  has  paid  its  proportion  of  the  losses  by  death  for 
the  year,  there  must  be  in  the  hands  of  the  company,  on 


RESERVE  185 

account  of  and  to  the  credit  of  each  and  every  outstanding 
policy,  an  amount  in  money  or  securely  invested  funds 
that  will  be  in  present  value  the  equivalent  of  a  life  series 
of  annual  premiums,  each  of  which  is  equal  to  the  differ- 
ence between  the  net  annual  premium  the  insured  paid  on 
taking  out  his  policy  and  the  net  annual  premium  he  would 
now  have  to  pay  if  he  were  taking  out  a  new  policy  at  his 
present  advanced  age.  This  amount  that  must  be  in  the 
hands  of  the  company  at  the  end  of  each  year's  business, 
to  the  credit  of  the  respective  policies,  is  variously  styled, 
by  life  insurance  writers,  "reserve"  "reserve  for  reinsur- 
ance," "net  premium  reserve,"  "net  value,"  "true  value," 
' '  self-insurance/ '  etc . 

As  before  stated,  the  net  annual  premium  to  insure 
$1000  at  age  42  is  $25.554,  and  the  net  annual  premium 
to  insure  the  same  amount  at  age  43  is  $26.585.  The 
difference  between  these  two  premiums  is  $1.031.  The 
value  at  age  43  of  a  life  series  of  annual  payments  of  $1 
is  from  the  table  found  to  be  $15.374.  We  can  find  the 
value  at  the  same  age  of  a  whole-life  series  of  annual  pay- 
ments, each  of  which  is  equal  to  $1.031,  by  the  proportion; 
$1:  $1.031:  :  $15.374  is  to  the  answer.  Solving  this  pro- 
portion, we  find  that  the  value  at  age  43  of  a  life  series  of 
annual  premiums  of  $1.031  is  equal  to  $15.851. 

If  the  company  has  the  $15.851  on  hand  in  deposit, 
which  is  the  cash  equivalent  of  this  difference  in  the  future 
net  annual  premiums,  this  amount  of  cash  in  hand,  to- 
gether with  the  smaller  net  annual  premium  due  at  the 
age  of  42,  is  just  the  same  value  as  the  net  annual  premium 
due  to  age  43.  This  $15.851  is  the  amount  that  must  be 
held  on  deposit  in  trust  for  the  policy  of  $1000  taken  out 
at  age  42,  at  the  end  of  the  first  year  of  the  policy. 

The  net  annual  premium  at  age  44  to  insure  $1000  for 
whole  life  is  found  from  the  same  table  to  be  $27.682. 
The  difference  between  the  net  annual  premium  due  to 
age  44,  and  that  which  the  person  insured  at  age  42  will 
pay  when  he  is  44  years  of  age,  is  obtained  by  subtracting 


186  YALE  READINGS  IN  INSURANCE 

$25.554  from  $27.682;  this  difference  is  $2.128,  and  there 
must  be  in  the  hands  of  the  company  a  deposit  at  the  end 
of  the  second  year  of  this  policy  equal  to  the  value  at  that 
time  of  a  whole-life  series  of  annual  premiums,  each  of 
which  is  equal  to  $2.128,  which  is  the  difference  between 
the  net  annual  premium  due  to  age  44  and  that  which 
the  insured  will  pay.  From  the  table,  we  find  that  the 
value  at  age  44  of  a  whole-life  series  of  net  annual  pre- 
miums of  $1  each  is  $15.119.  We  find  the  value  at  same 
age  of  a  whole-life  series  of  annual  premiums,  each  of  which 
is  $2.128,  by  the  proportion;  $1:  $2.128:  :  $15.119  is  to  the 
answer. 

Solving  this  proportion,  we  find  the  value  sought  is 
$32.172.  This  is  the  fund  on  deposit,  or  the  "reserve," 
for  this  policy  at  the  end  of  the  second  year.  In  a  manner 
entirely  similar,  we  find  the  amount  that  must  be  on 
deposit  at  the  end  of  each  policy  year;  and  if  the  company 
has  it  on  hand,  and  keeps  it  securely  invested  at  the  net 
rate  of  interest,  and  regularly  compounds  the  interest 
yearly,  this  "trust  fund  deposit/'  together  with  the  present 
value  of  the  future  net  annual  premiums,  will  always  keep 
the  policy  that  is  paying  the  smaller  net  annual  premiums, 
due  to  the  younger  age  at  which  the  holder  entered  the 
company,  just  on  a  par  with  those  policies  that  come  in 
later,  or  at  a  more  advanced  age  of  entry,  and  pay  the 
larger  annual  premium  due  to  this  advanced  age. 

The  amount  of  this  deposit  may  be  calculated  by  a 
somewhat  different  process,  as  follows:  At  the  time  the 
contract  is  entered  into,  the  value  at  that  time  of  the 
whole-life  series  of  net  annual  premiums  to  be  paid  for 
the  policy  is  exactly  equal  to  the  net  single  premium 
at  that  age.  Remember  that  the  net  single  premium 
is  obtained  by  direct  calculation  for  insurance  each 
separate  year,  and  we  convert  the  net  single  premium 
into  an  equivalent  net  annual  premium.  At  the  end 
of  any  policy  year,  find  the  net  single  premium  due  to 
that  age,  then  find  the  value  at  that  age  of  the  series 


RESERVE  187 

of  net  annual  premiums  the  insured  is  to  pay;  this  will 
be  less  than  the  net  single  premium  that  at  that  age 
will  effect  the  insurance,  and  this  difference  is  the  amount 
that  must  be  held  by  the  company  in  deposit  to  the 
credit  of  the  policy.  For  instance,  at  age  42  the  net 
single  premium  to  insure  $1000  for  whole  life,  actuaries'  4 
per  cent.,  is  $399.184,  and  this  is  the  value  at  that  age  of 
the  whole-life  series  of  ten  annual  premiums,  $25.554,  due 
to  the  age.  At  the  end  of  the  twentieth  policy  year,  the 
insured,  if  alive,  will  be  62  years  old.  The  net  single  pre- 
mium required  to  insure  $1000  for  whole  life  at  62  is 
$623.826.  Now  the  value  at  age  62  of  a  life  series  of  an- 
nual payments  of  $1  each  is  $9.781;  multiply  this  by  the 
net  annual  premium  the  insured  is  paying,  that  is,  $25.554, 
and  we  have  the  value  at  age  62  of  the  series  of  net  annual 
premiums  the  insured  is  to  pay.  This  amounts  to  $249.931, 
but  direct  calculation  shows,  as  stated  above,  that  the 
insurance  on  the  assumed  table  of  mortality  and  rate  of 
interest  can  not  be  effected  at  that  age  for  less  than  $623.826 
net  single  premium.  The  difference  between  this  sum  and 
the  value  of  the  series  at  age  62  which  the  insured  is  to 
pay  must  be  held  by  the  company  in  deposit  to  the  credit 
of  the  policy;  therefore,  subtracting  $249.931  from  $623.826 
we  have  $373.895,  which  is  the  sum  that  must  be  in  de- 
posit at  the  end  of  the  twentieth  policy  year  belonging  to 
a  policy  taken  out  at  age  42  for  $1000. 

It  is  necessary  to  have  the  value  of  the  net  single  pre- 
mium at  each  age,  and  all  that  portion  of  this  value  not 
in  the  present  value  of  the  future  net  annual  premiums 
must  be  on  hand  in  deposit.  Therefore,  a  company  that 
charges  a  less  net  annual  premium  than  that  called  for 
by  the  table  of  mortality  and  rate  of  interest  designated 
by  law  must  be  required  to  add  to  what  would  be  the 
legal  deposit,  in  case  the  future  net  premiums  are  equal 
to  those  required  by  the  law,  an  amount  equal  to  the  value 
at  that  time  of  a  series  of  annual  premiums  each  of  which 
is  equal  to  the  difference  between  the  net  annual  premium 


188  YALE  READINGS  IN  INSURANCE 

called  for  by  the  legal  data  and  the  net  annual  premium 
the  company  has  agreed  to  receive. 

Illustration.  —  To  illustrate  the  manner  in  which  the 
"deposit"  must  accumulate  in  the  earlier  years  of  a  life 
insurance  company,  in  order  to  enable  it  to  meet  its  obli- 
gations when  the  death  claims  exceed  the  premiums,  let 
us  suppose  that  a  company  insures  20,000  policy-holders 
for  $5000  each,  at  age  30.  The  net  annual  premium  re- 
quired for  each  person  is  $84.85.  This,  on  20,000  policies, 
would  make  the  first  payment  of  annual  premiums  amount 
to  $1,697,000.  The  net  interest  is  assumed  to  be  4  per 
cent.,  and,  for  the  first  year,  it  amounts  to  $67,880.  The 
company  has,  therefore,  at  the  end  of  the  first  year,  $1,764,- 
880.  By  the  table  of  mortality,  168  of  the  insured  will 
die  during  the  first  year;  to  the  heirs  of  each,  the  company 
must  pay  $5000.  The  losses  by  death  are,  therefore, 
$840,000;  leaving  on  hand  with  the  company,  after  all 
the  death  claims  are  paid,  $924,880;  which  would  be  a 
handsome  "surplus"  at  the  end  of  the  first  year's  business, 
but  for  the  fact  that  every  dollar  of  this  sum  belongs  to 
the  trust  fund  deposit,  and  is  an  already  accrued  liability 
—  a  debt. 

At  the  end  of  the  thirty-fourth  year  the  deposit  for  each 
outstanding  policy  must  be  $2464.25.  The  table  of  mor- 
tality shows  that  11,297  of  the  policy-holders  will  be 
living  at  the  end  of  the  thirty-fourth  year;  the  company 
must,  therefore,  have  on  hand  a  trust  fund  deposit  amount- 
ing to  $27,838,632.25.  We  find  that  11,742  policy-holders 
were  living  at  the  beginning  of  the  thirty-fourth  year,  and 
their  net  annual  premiums  amounted,  in  the  aggregate, 
to  $996,308.70.  There  were  445  deaths  during  the  year, 
and  the  aggregate  losses  by  death  amounted  to  $2,225,000. 
Thus,  in  this  year,  the  death  claims  exceed  the  annual 
premiums  by  more  than  one  and  one  quarter  millions  of 
dollars.  But  the  company  has  on  hand,  in  deposit,  at 
the  end  of  the  year,  $27,838,632.25,  after  having  paid  the 
death  claims.  The  company,  however,  is  not  rich,  nor 


RESERVE  189 

more  than  able  to  pay  its  liabilities,  because  it  will  surely 
take  the  last  cent  of  this  amount,  with  all  the  future  net 
annual  premiums,  and  interest  compounded  regularly  all 
the  time,  to  enable  it  to  meet  and  pay  its  now  rapidly 
increasing  death  claims. 

Let  us  look  into  the  accounts  of  the  company  at  the  end 
of  the  fiftieth  year.  The  "deposit"  on  account  of  each 
policy  at  the  end  of  this  year  is  $3708.20;  and  there  are 
living  3080  policy-holders.  The  aggregate  "deposit"  for 
the  outstanding  policies  at  this  time  is  $11,421,256.  There 
were  461  deaths  during  the  year,  and  the  aggregate  of 
policies  that  matured  during  the  year  amounted  to 
$2,305,000.  There  were  3541  policy-holders  living  at  the 
beginning  of  the  year,  and  the  aggregate  of  the  net  annual 
premiums  paid  by  them  amounted  to  $300,453.85.  We 
see  from  this  that  the  losses  by  death  during  the  year 
exceeded  the  net  annual  premiums  by  more  than  $2,000,000. 
The  "deposit"  is  reduced  to  $11,421,256,  which  is  less  than 
one-half  the  amount  in  "deposit"  at  the  end  of  the  thirty- 
fourth  year.  But  the  company  has  not  lost  money,  it 
has  only  been  paying  its  debts.  At  the  end  of  the  thirty- 
fourth  year  it  had  more,  but  it  owed  more.  It  had  enough 
then,  and  only  enough,  to  pay  what  it  owed;  it  is  in  the 
same  condition  now. 

At  the  end  of  the  sixty-fifth  year  we  find  the  "deposit" 
that  must  be  in  the  hands  of  the  company  to  the  credit 
of  each  policy  is  $4560.87;  and  there  are  twenty  of  the 
original  policy-holders  living.  The  aggregate  "deposit" 
for  these  twenty  outstanding  policies  is  $91,217.40.  The 
$27,838,632.25  that  the  company  had  on  hand  at  the  end 
of  the  thirty-fourth  year  is  now  reduced  to  less  than 
$100,000.  But  the  company  has  only  been  paying  its 
debts  to  policy-holders  —  not  losing  money.  In  fact,  it 
had  none  to  lose  of  its  oivn. 

At  the  end  of  the  sixty-ninth  year  the  "deposit"  amounts 
to  $4722.84;  and  there  is  one  policy-holder  living.  He 
pays  his  regular  net  annual  premium  the  day  he  is  99 


190  YALE  READINGS  IN  INSURANCE 

years  old.  The  premium  is  $84.85.  This,  added  to  the 
"deposit"  on  hand  at  the  end  of  the  preceding  year, 
makes  $4807.69  of  this  policy-holder's  money  in  the  hands 
of  the  company  the  day  the  policy-holder  is  99  years  old. 
At  net  interest,  which  is  4  per  cent.,  the  interest  for  the  year 
will  amount  to  $192.31;  and  this,  added  to  the  amount, 
$4807.69,  on  hand  at  the  beginning  of  the  year,  makes 
$5000,  with  which  to  pay  the  policy  of  the  last  policy- 
holder  in  this  company. 

We  see  that  the  $27,838,632.25,  which  the  company 
had  in  its  possession  at  the  end  of  the  thirty-fourth  year, 
belonging  to  policy-holders,  has  been  paid  to  them.  The 
policies  were  all  paid  at  maturity;  the  company  has 
nothing  left.  In  fact,  it  never  had  a  cent  of  its  own  during 
the  whole  time,  although  we  have  seen  it  the  custodian, 
at  one  time,  of  nearly  $28,000,000  of  other  people's  money. 
It  owed  every  cent,  and  it  paid  every  cent  it  owed. 

It  is  a  marked  peculiarity  of  life  insurance  business,  as 
seen  in  this  illustration,  that  the  annual  premiums  exceed 
the  death  claims  for  the  first  30  or  40  years;  after  which 
time  the  losses  by  death  largely  exceed  the  annual  pre- 
miums. The  trust  fund  deposit,  after  a  table  of  mortality 
and  rate  of  interest  have  been  designated,  is  a  fixed  mathe- 
matical amount;  it  increases  for  each  policy  at  the  end  of 
every  succeeding  year  of  the  existence  of  the  policy. 


RESERVE 


191 


DEPOSIT  AT  THE  END  OF  EACH  YEAR  ON  A  WHOLE-LIFE  POLICY  FOE 

$1000,  TAKEN  OUT  AT  AGE  45  —  AMERICAN  EXPERIENCE  — 

FOUR  PER  CENT. 


Age 

Deposit 

Age 

Deposit 

Age 

Deposit 

45  .... 

$17.24 

62  .... 

368.46 

79  .... 

$712.77 

46  .... 

34.98 

63  .... 

390.72 

80  .... 

730.56 

47  .... 

53.22 

64  .... 

412.91 

81  .... 

748.03 

48  .... 

71.95 

65  .... 

434.96 

82  

765.24 

49  .... 

91.18 

66  

456.82 

83  .... 

782.37 

50  .... 

110.72 

67  .... 

478.45 

84  .... 

799.49 

51  .... 

130.72 

68  .... 

499.78 

85  .... 

816.43 

52  .... 

151.09 

69  .... 

520.78 

86  .... 

832.90 

53  .... 

171.81 

70  .... 

541.39 

87  .... 

848.53 

54  .... 

192.85 

71  .... 

561.58 

88  .... 

863.28 

55  .... 

214.18 

72  .... 

581.39 

89  .... 

877.54 

56  .... 

235.75 

73  .... 

600.85 

90  .... 

891.55 

57  .... 

257.55 

74  .... 

620.02 

91  .... 

904.65 

58  .... 

279.53 

75  .... 

638.95 

92  

915.35 

59  .... 

301.66 

76  .... 

657.70 

93  .... 

925.41 

60  .... 

323.88 

77  .... 

676.26 

94  .... 

934.42 

61  .... 

346.16 

78  .... 

694.62 

95  .... 

1000.00 

CHAPTER  XIV 

NET   VALUATION  1 

THE  insurance  laws  of  the  several  states  require  every 
regular  life  insurance  company  to  have  on  hand  at  all  times 
cash  or  approved  securities  not  less  in  amount  than  the 
net  value  of  its  outstanding  policies,  according  to  the 
minimum  legal  standard  of  valuation. 

By  net  value  is  meant  the  amount  of  the  reserve  per- 
taining to  the  policy  at  any  stated  time.  It  is  always 
the  difference  between  the  present  worth  of  the  net  pre- 
miums to  be  paid  on  the  policy,  and  the  present  worth 
of  the  benefits  guaranteed  thereunder  —  such  as  amounts 
payable  at  death,  at  maturity,  on  surrender,  etc. 

Net  valuation  is  the  process  of  determining  the  legal 
net  value  or  reserve  of  a  company's  outstanding  policies, 
the  net  premium  only  —  not  the  gross  premium  —  being 
considered.  To  understand  what  is  meant  by  the  term 
minimum  legal  standard  of  valuation,  observe  that,  in 
the  computation  of  the  premium,  it  is  assumed  that  the 
reserve  will  earn  a  specified  rate  of  interest.  In  the  case 
of  most  companies  nowadays,  the  rate  assumed  is  3  per 
cent.  On  this  basis,  the  required  net  annual  premium  of 
an  ordinary  life  policy  issued  at  age  56  was  found  to  be 
$47.76.  The  reserve  or  insurance  fund,  consisting  of  the 
net  premium  receipts  plus  the  interest  earned  thereon  at 
the  assumed  rate,  suffices  for  the  payment  of  all  existing 
policies  at  maturity. 

1  Reprinted  by  special  permission  from  pages  78-87  and  114-122  of 
the  "Educational  Leaflets"  issued  by  the  Mutual  Life  Insurance 
Company  of  New  York. 

192 


NET  VALUATION  193 

It  is  obvious  that,  in  order  to  accumulate  a  specific  sum 
within  a  stated  time  by  means  of  small  yearly  deposits, 
the  deposits  must  be  larger  if  the  interest  to  be  added  to 
the  fund  is  at  the  rate  of  only  3  per  cent,  than  if  3£  or  4 
per  cent,  interest  is  to  be  received.  It  is,  therefore,  equally 
clear  that,  if  the  net  premium  receipts  of  a  life  insurance 
company  were  certain  to  earn  3£  or  4  per  cent,  interest, 
the  rates  necessary  to  provide  funds  sufficient  for  the 
payment  of  all  policies  at  maturity  would  be  lower  than 
when  only  3  per  cent,  interest  is  realized.  •  In  other  words, 
when  the  reserve  is  to  be  accumulated  at  3  per  cent,  inter- 
est, larger  net  premiums  are  necessary  than  when  a  higher 
interest  rate  is  assumed. 

In  all  cases,  whatever  the  rate  of  interest  assumed, 
the  reserve  at  the  attained  age  of  96  is  equal  to  the  face 
of  the  policy.  The  reserve  at  the  end  of  the  thirty-ninth 
year  at  the  attained  age  of  95  is  $923.11.  That  sum  plus 
the  next  year's  net  premium,  $47.76,  plus  3  per  cent, 
interest,  amounts  to  $1000  at  the  end  of  the  year  at  the 
attained  age  of  96.  Had  it  been  assumed  in  the  computa- 
tion that  the  funds  would  earn  4  per  cent.,  the  required 
net  premium  would  have  been  only  $45  instead  of  $47.76, 
and  the  reserve  at  the  attained  age  of  95  would  have  been 
$916.54  instead  of  $923.11.  Observe  that  $916.54,  plus 
the  next  year's  net  premium  of  $45,  plus  4  per  cent,  inter- 
est, likewise  amounts  to  $1000  at  the  end  of  the  year  at 
the  attained  age  of  96.  Thus,  as  stated  before,  the  higher 
the  rate  of  interest  assumed,  the  smaller  will  be  the  re- 
serve pertaining  to  any  policy.  A  3|  per  cent,  reserve  is 
larger  than  one  computed  on  a  4  per  cent,  basis  and  smaller 
than  a  3  per  cent,  reserve. 

The  laws  of  the  several  states  prescribe  the  maximum 
rate  of  interest  that  may  be  assumed,  and  the  mortality 
table  that  shall  be  used,  in  computing  the  reserve  or  net 
value  of  a  company's  policies.  This  requirement  is  termed 
the  legal  standard  of  valuation.  The  net  value  com- 
puted by  the  legal  standard  is  termed  the  legal  net  value 


194  YALE  READINGS  IN  INSURANCE 

or  legal  reserve.  In  several  states  the  rate  of  interest 
fixed  by  the  minimum  legal  standard,  or  the  lowest  stand- 
ard prescribed  by  law,  is  4£  per  cent.  —  in  others  4  per 
cent.  In  New  York,  Massachusetts,  and  one  or  two  other 
states,  the  minimum  legal  standard  calls  for  3|  per  cent, 
interest,  so  that  a  company  whose  premiums  are  computed 
on  a  4  per  cent,  reserve  basis  must,  in  order  to  do  business 
in  those  states,  submit  to  a  valuation  by  the  higher  standard 
of  3£  per  cent.  Many  companies  have  recently  adjusted 
their  premiums  for  new  business  to  a  3  per  cent,  basis, 
and  are  accumulating  3  per  cent,  reserves  accordingly, 
notwithstanding  the  lower  minimum  standard  provided 
by  law. 

Knowing  the  ages  of  the  several  policy-holders,  we  may 
determine  how  many  according  to  the  mortality  table 
will  die  in  each  year  thereafter,  and  how  many  will  be 
living  at  the  end  of  each  year,  and  hence  the  amount  of 
claims  to  be  expected  in  each  year  until  all  existing  policies 
have  matured,  either  by  the  death  of  the  policy-holder  or 
the  expiration  of  the  term  for  which  the  contract  was 
written.  Having  these  data  we  may  compute  the  present 
worth  or  present  value  of  all  outstanding  policies  —  that 
is,  the  sum  which  accumulated  at  a  given  rate  of  interest, 
say  3  per  cent.,  will  equal  an  amount  sufficient  to  pay  every 
policy  in  full  as  the  latter  matures. 

In  like  manner,  knowing  how  many  policy-holders  will 
be  living  according  to  the  table  at  the  beginning  of  each 
subsequent  year,  to  pay  the  premiums  called  for  by  the 
several  policies,  we  may  determine  the  net  premium  in- 
come of  each  year  until  the  last  existing  policy  has  matured. 
Hence  we  may  compute  the  present  worth  of  all  future 
net  premiums  to  be  collected  on  outstanding  policies. 

Let  us  now  take  for  illustration  the  case  of  a  company 
issuing  100,000  policies,  aggregating  a  total  of  $100,000,000 
insurance.  Assume  that  the  present  worth  of  those 
policies  —  that  is,  the  present  worth  of  the  benefits  to 
accrue  under  their  terms,  is  found  to  be  $37,055,000. 


NET  VALUATION  195 

This  sum  then  constitutes  the  present  value  of  the  policy 
obligations  which  the  company  has  assumed.  To  pay 
these  policies  as  they  mature,  the  company  has  no  other 
resource  than  the  net  premiums  stipulated  to  be  paid 
thereon  plus  the  interest  which  those  premiums  will  earn 
at  the  assumed  rate,  say  3  per  cent.  If  now  the  present 
worth  of  these  premiums  is  likewise  found  to  be  $37,055,000, 
it  is  obvious  that  the  company  is  solvent  and  will  —  if 
3  per  cent,  interest  is  earned  and  the  mortality  does  not 
exceed  that  indicated  by  the  table  —  be  able  to  meet  its 
obligations  at  maturity.  A  statement  of  its  assumed 
condition  would  be  as  follows : 

CREDIT  SIDE 

Present  worth  of  net  premiums  to  be  collected  on  existing 
contracts    $37,055,000 

DEBIT  SIDE 
Present  worth  of  benefits  under  outstanding  policies $37,055,000 

Such  would  be  the  exact  status  of  a  legally  solvent 
mutual  company  the  day  it  begins  business,  after  a  num- 
ber of  policies  have  been  written  but  before  any  premiums 
have  been  collected. 

Let  us,  however,  take  the  same  company  after  several 
years'  premiums  have  been  collected  and  a  number  of  poli- 
cies paid,  a  reasonable  amount  of  new  business  having  been 
written  in  the  meantime.  As  some  of  the  net  premiums 
called  for  by  existing  contracts  have  been  received  and 
applied,  the  present  worth  of  the  premiums  remaining  to 
be  collected  will  no  longer  equal  the  present  worth  of  bene- 
fits under  policies  now  outstanding.  Assume,  for  example, 
the  present  worth  of  those  benefits  to  be  now  $38,000,000, 
and  the  present  worth  of  future  net  premiums  $34,000,000. 
The  present  worth  of  benefits  promised,  or  obligations 
assumed,  will  be  larger  than  at  first,  because  every  exist- 
ing policy  is  nearer  maturity,  while  the  present  worth  of 
net  premiums  to  be  collected  in  the  future  will  be  less  than 


196  YALE  READINGS  IN  INSURANCE 

before,  because  some  part  of  the  premiums  originally 
called  for  by  every  existing  policy  have  already  been 
collected.  Our  debits  then  in  this  case  would  exceed  our 
credits  by  $4,000,000,  and  the  statement  would  now  be 
as  follows: 

CREDIT  SIDE 
Present  worth  of  net  premiums  to  be  collected  on  existing 

policies  $34,000,000 

Deficit 4,000,000 

$38,000,000 
DEBIT  SIDE 

Present  worth  of  benefits  under  outstanding  policies $38,000,000 

The  company  is  now  clearly  insolvent  under  the  law, 
for  the  present  worth  of  net  premiums  to  be  received  — 
its  only  apparent  resources  —  is  $4,000,000  less  than  the 
present  worth  of  the  benefits  to  be  paid.  This  deficit 
represents  the  legal  reserve  liability  of  the  company  - 
that  is,  the  net  value  of  its  outstanding  policies  accord- 
ing to  the  legal  standard  of  valuation,  being  the  difference 
between  the  present  worth  of  the  benefits  for  which  the 
company  is  liable  under  its  policies  and  the  present  worth 
of  all  the  net  premiums  to  be  received.  If  the  company, 
however,  after  providing  for  the  tabular  mortality  and 
matured  endowments,  has  reserved  from  year  to  year  the 
balance  of  its  net  premium  and  interest  income,  the  funds 
so  reserved  will  now  aggregate  exactly  the  amount  of  the 
computed  reserve  liability.  In  other  words,  it  will  have 
on  hand  the  reserve  required  by  law  to  maintain  solvency, 
and  the  statement  of  its  condition  will  now  assume  the 

following  form : 

CREDIT  SIDE 

Present  worth  of  net  premiums  remaining  to  be  collected 

on  existing  policies $34,000,000 

Reserve  (Cash  and  Invested  Funds)     4,000,000 

$38,000,000 
DEBIT  SIDE 

Present  worth  of  benefits  contracted  for  in  outstanding 

policies  $38,000,000 


NET  VALUATION  197 

This  suggests  the  definition  of  the  legal  reserve  given 
above,  to  wit:  "A  fund  equal  in  amount  to  the  excess  of 
the  present  value  of  benefits  under  outstanding  policies 
over  the  present  value  of  net  premiums  to  be  paid  on 
those  policies." 

On  the  basis  of  the  statement  as  last  rendered,  the  com- 
pany is  technically  solvent,  since  the  credits  and  debits 
arc  equal.  The  form  of  the  statement  may  be  simplified 
by  eliminating  the  two  items,  "Present  worth  of  net  pre- 
miums" and  "Present  worth  of  policies,"  and  simply 
carrying  to  the  debit  side  of  the  account  the  difference 
between  the  present  worth  of  policy  obligations  and  the 
present  worth  of  premiums  to  be  collected,  which  is,  the 
company's  legal  reserve  liability,  or  the  net  value  of  the  bene- 
fits guaranteed  under  its  outstanding  policies.  As  the 
company  holds  cash  and  invested  funds  to  the  amount 
of  this  liability,  the  statement  will  assume  the  following 
form: 

CREDIT  SIDE 
Cash,  Invested  Funds,  and  Credits  (Assets)    $4,000,000 

DEBIT  SIDE 
Net  value  of  all  outstanding  policies  (Liability) $4,000,000 

The  comparison  of  a  company's  admitted  assets  — 
money,  invested  funds,  and  valid  credits  approved  by  the 
insurance  authorities  —  with  its  total  liabilities  consti- 
tutes the  legal  test  of  its  solvency.  By  the  financial  state- 
ment last  above  set  out,  the  company  in  question  is  legally 
solvent  —  its  assets  being  exactly  equal  to  its  liabilities; 
nevertheless,  a  company  in  just  that  condition  would  in 
fact  be  upon  the  verge  of  bankruptcy,  for  the  loss  of  a 
small  amount  by  depreciation  of  values,  extra  mortality, 
or  other  cause,  would  render  it  insolvent  under  the  law. 
Such  being  the  case,  it  is  of  the  first  importance  for  every 
company  to  maintain  as  a  margin  of  safety  an  additional 
fund  in  excess  of  all  legal  liabilities,  variously  termed 


198  YALE  READINGS  IN  INSURANCE 

"surplus,"  "indivisible  surplus,"  "unassigned  funds,"  etc. 
Under  the  New  York  law  this  extra  fund  or  margin  of 
safety  is  called  the  contingency  reserve.  Assuming  that 
the  company  in  question  has  such  additional  funds  to  the 
amount  of  $1,000,000,  a  statement  of  its  financial  con- 
dition would  then  read : 

ASSETS 
Cash,  Invested  Funds,  and  Credits    $5,000,000 

LIABILITIES 

Net  value  of  all  outstanding  policies $4,000,000 

Contingency  Reserve  (Surplus)   1,000,000      $5,000,000 

In  the  above  case,  a  loss  of  assets  in  excess  of  $1,000,000 
would  sweep  away  the  contingency  reserve  and  render 
the  company  insolvent.  The  smaller  the  amount  of  such 
additional  fund,  the  more  imminent  the  danger.  It  is 
obvious,  therefore,  that  the  measure  of  a  company's 
strength  is  to  be  gauged  by  the  amount  of  extra  or  surplus 
funds  which  it  holds  in  addition  to  the  legal  reserve  or 
net  value  of  its  outstanding  policies,  as  well  as  by  the 
percentage  which  such  extra  funds  are  of  the  total  liabilities, 
i.e.,  the  company's  "ratio  of  assets  to  liabilities."  For 
example:  According  to  the  statistics  for  1906,  a  certain 
company  of  well-known  excellence  had  surplus  funds  at 
the  end  of  that  year  of  nearly  $8,000,000,  and  a  ratio  of 
assets  to  liabilities  of  108;  that  is,  its  assets  exceeded  its 
liabilities  by  only  8  per  cent. 

On  the  other  hand,  the  assets  of  a  smaller  company  of 
considerable  prominence  exceeded  its  liabilities  by  29  per 
cent.,  yet  its  total  surplus  funds  were  less  than  $130,000. 
Assuming  that  the  assets  in  each  case  were  of  the  highest 
class,  there  can  be  no  doubt  as  to  the  relative  strength  of 
the  two  organizations  —  the  same  being  the  reverse  of 
what  might  be  inferred  if  only  the  ratios  cited  were  to  be 
considered.  A  surplus  of  only  $130,000  might  be  readily 
wasted  or  lost  in  a  single  transaction  —  far  more  readily, 


NET  VALUATION  199 

it  will  be  conceded,  than  a  surplus  of  nearly  $8,000,000. 
A  still  more  striking  illustration  of  the  misleading  char- 
acter of  this  ratio  is  afforded  by  the  figures  of  a  still  smaller 
company  with  a  ratio  of  assets  to  liabilities  of  592  and 
a  total  surplus  of  less  than  $21,000.  In  another  case,  if 
the  assets  of  a  company  were  largely  of  real  estate  or  of 
fluctuating  securities,  a  surplus  of  8  per  cent,  or  less  — 
however  large  in  amount  —  might  easily  be  swept  away 
by  a  sudden  depreciation  of  values,  if  current  market 
quotations  were  to  be  taken  as  a  basis  of  valuation. 

Several  modifications  of  the  system  of  net  valuation 
described  in  the  foregoing  pages  have  been  established 
by  recent  legislation. 

The  statement  may  be  safely  made  that  the  ordinary 
loading  of  a  life  insurance  premium  is  never  sufficient  in 
the  first  year  to  meet  the  expenses  incident  to  securing 
the  business.  To  illustrate:  If  the  gross  premium  of  an 
ordinary  life  policy  at  age  56,  American  Experience  Table, 
and  3  per  cent,  interest,  is  $63.68,  we  find  by  deducting 
the  net  premium  of  $47.76  that  the  loading  is  $15.92. 
The  principal  items  of  expense  the  first  year  will  be  the 
agent's  commission,  say  40  per  cent.,  or  $25.47,  and  the 
medical  examiner's  fee,  $5,  making  for  these  two  items 
alone  $30.47,  or  nearly  double  the  amount  of  the  loading. 
As  the  net  premium  can  not  be  trenched  upon,  the  discrep- 
ancy of  $14.55  is  temporarily  advanced  from  the  accumu- 
lated surplus,  the  latter  to  be  recouped  subsequently  from 
the  saving  in  mortality  or  other  gains  accruing  to  the  new 
policy. 

In  the  case  of  new  companies,  however,  and  others 
which  have  accumulated  but  little  surplus,  the  policy 
sometimes  provides  that  the  contract  shall  be  valued  in 
the  first  year  as  term  insurance,  the  regular  life  insurance 
policy  beginning  one  year  later.  Thus  the  entire  first 
premium,  less  only  the  charge  for  the  actual  mortality  of 
the  year,  is  available  as  a  loading  for  meeting  the  cost  of 
new  business.  This  method  is  variously  designated  as 


200  YALE  READINGS  IN  INSURANCE 

the  preliminary  term,  or  first-year  term  system,  and  has 
been  adopted  by  most  companies  organized  in  recent 
years.  In  the  case  of  a  preliminary  term  ordinary  life 
policy  at  age  56,  the  net  premium  in  the  first  year  would 
be  merely  the  natural  premium,  or  yearly  term  rate,  that 
is,  $19.31,  as  given  above.  The  practice  of  preliminary 
term  companies  is,  however,  to  charge  the  same  gross 
premium  in  the  first  as  in  subsequent  years.  If  the  gross 
premium  is  $63.68,  we  shall  have,  after  deducting  the 
net  premium  of  $19.31,  a  loading  the  first  year  of  $44.37, 
or  about  70  per  cent.  Deducting  $5  for  medical  examina- 
tion, there  remains  a  balance  of  $39.37,  or  nearly  62  per 
cent.,  for  commissions  and  other  expenses. 

In  the  valuation  of  such  a  contract  the  company  is  not, 
of  course,  charged  with  any  reserve  at  the  end  of  the  first 
year,  but  during  the  second  and  subsequent  years  the  net 
premium  required  will  be  that  of  an  ordinary  life  corre- 
sponding to  age  57,  the  attained  age  of  the  insured  when 
the  regular  life  policy  begins.  In  this  case,  then,  the  net 
premium  in  the  second  and  subsequent  years  would  be 
$50.13  instead  of  $47.76  (the  net  premium  at  age  56), 
and  if  this  amount  be  deducted  from  the  gross  premium 
of  $63.68,  the  balance  of  $13.55  will  be  the  permanent 
loading  instead  of  $15.92.  Thus  it  will  be  seen  that  by 
this  system  the  loading  is  greatly  increased  in  the  first 
year,  but  is  materially  less  than  the  regular  loading  in 
subsequent  years.  There  will  be  no  reserve  at  the  end  of 
the  first  year,  and  the  reserve  of  the  second  policy  year 
will  be  the  same  as  the  first  year  reserve  of  a  regular 
ordinary  life  policy  issued  at  age  57.  In  fact,  from  the 
beginning  of  the  second  year  the  policy  will  be  valued  as 
an  ordinary  life  issued  at  age  57,  or  one  year  later  than  its 
actual  date,  as  stated  above.  It  follows  that  the  reserve 
of  an  ordinary  life  policy  issued  on  the  preliminary  term 
plan  will  always  be  less  than  it  would  have  been  had  it 
been  issued  at  the  same  age  on  the  regular  ordinary  life 
plan,  because  always  one  year  behind  in  the  process  of 


NET  VALUATION  201 

accumulation.  This  difference  will  continue  until  age  96, 
when  the  reserve  in  either  case  becomes  equal  to  the  face 
of  the  policy.  It  will  be  appreciated  that  smaller  reserves 
mean  smaller  cash  values,  and  also  that  smaller  loadings 
mean  smaller  dividends. 

We  have  heretofore  defined  the  terms  "level  premium" 
and  "net  valuation."  Under  the  preliminary  term  sys- 
tem the  gross  premium  may  be  level  from  date  of  issue 
of  policy,  but  the  net  premium  is  not  so.  For  example, 
in  the  case  just  illustrated,  the  net  premium  in  the  first 
year  is  $19.31  and  in  subsequent  years  $50.13,  though 
the  gross  premium  is  $63.68  for  every  year.  On  the  other 
hand,  we  have  seen  that  the  net  premium  of  the  equivalent 
ordinary  life  policy  on  the  regular  legal  reserve  plan  is 
$47.76,  the  same  fixed  amount  for  every  year  including 
the  first.  This  is  what  is  meant  by  a  net  level  premium, 
and  the  valuation  of  policies  on  this  basis  is  strictly  net 
level  premium  valuation,  though  commonly  termed  simply 
"net  valuation." 

In  the  case  of  a  "limited  premium"  policy  the  pre- 
liminary term  plan  varies  somewhat  from  that  illustrated. 
Let  us  consider  its  application,  for  example,  to  a  fifteen- 
payment  life.  The  net  3  per  cent,  premium  of  the  regular 
policy  at  age  56  would  be  $60.17.  If  the  gross  premium  is 
$78.16,  the  yearly  loading  will  be  $17.99.  On  a  prelimi- 
nary term  basis,  the  equivalent  contract  would  consist  of 
a  combined  one-year  term  policy  and  a  fourteen-payment 
life,  the  latter  beginning  at  age  57.  The  net  premium  for 
one  year's  term  insurance  would  be  the  same  as  before, 
$19.31.  Deducting  this  amount  from  the  gross  premium 
of  $78.16,  we  obtain  a  first-year  loading  of  $58.85.  The 
3  per  cent,  net  premium  of  the  fourteen-payment  life  at 
age  57  would  be  $64.55,  wrhich  leaves  a  yearly  loading  of 
$13.61,  instead  of  $17.99,  for  the  remaining  fourteen  years. 
As  in  the  case  of  the  preliminary  term  ordinary  life,  there 
will  be  no  reserve  at  the  end  of  the  first  year.  At  the  end 
of  the  second  policy  year  the  reserve  will  be  $46.14.  This 


202  YALE  READINGS  IN  INSURANCE 

is  larger  than  the  first-year  reserve  of  the  regular  policy, 
but  much  smaller  than  the  reserve  of  the  latter  at  the  end 
of  the  second  policy  year,  it  being  then  $86.72.  The  pre- 
liminary term  reserve  at  the  end  of  each  subsequent  policy 
year  approaches  more  and  more  nearly  to  the  correspond- 
ing reserve  of  the  regular  fifteen-payment  life  until  the 
end  of  the  fifteenth  year  when,  at  the  attained  age  of 
71,  both  reserves  are  necessarily  the  same,  since  both  poli- 
cies are  now  fully  paid  up.  In  other  words,  on  the  regular 
fifteen-payment  life  the  reserve  of  a  fully  paid  policy  is 
accumulated  in  fifteen  years,  while  on  the  preliminary 
term  fifteen-payment  life  the  same  reserve  is  accumulated 
during  the  last  fourteen  years. 

The  preliminary  term  system,  as  applied  to  an  ordinary 
life  policy,  is  not  an  unreasonable  method  of  providing 
for  the  cost  of  new  business  in  the  case  of  a  young  com- 
pany, notwithstanding  the  apparent  injustice  of  charging 
a  premium  of  $63.68  for  term  insurance  during  a  single 
year,  the  net  natural  cost  of  which  is  $19.31.  Indeed,  only 
by  the  use  of  some  such  expedient  would  it  be  possible 
for  a  new  company  to  establish  itself  at  all  on  the  mutual 
plan,  since  being  in  receipt  of  little  or  nothing  from  load- 
ings on  old  business,  and  having  no  accumulated  surplus, 
it  would  be  unable  to  meet  the  necessary  cost  of  new 
insurance  and  provide  at  the  same  time  for  the  required 
legal  reserve  of  the  first  year.  Only  on  the  stock  plan,  with 
the  stockholders  personally  advancing  extra  funds  for 
the  purchase  of  new  business,  could  a  new  company  com- 
ply with  the  requirement  to  put  up  the  full  net  level  pre- 
mium reserves  on  its  policies  beginning  with  the  year  of 
issue.  The  adoption  of  the  preliminary  term  plan  by  an 
old  company,  however,  is  commonly  regarded  as  a  con- 
fession of  weakness  or  of  an  extravagant  management, 
since  it  is  a  virtual  admission  that  the  company  is  unable 
to  keep  its  expenses  within  its  aggregate  receipts  from 
loadings,  and  that  it  dares  not  trench  upon  its  limited 
surplus. 


NET  VALUATION 


203 


If  the  application  of  the  preliminary  term  plan  to  the 
ordinary  life  policy  be  defensible,  it  nevertheless  becomes 
decidedly  objectionable  when  applied  without  modifica- 
tion to  limited  payment  and  endowment  policies,  as 
illustrated  in  the  following  table  showing  the  loadings 
of  the  first  year : 


Policy,  Age  56 

Gross 
Premium 

Net 
Natural  Cost 

Loading 

Ordinary  life  

$63.68 

$19.31 

$4437 

Fifteen-payment  life     

78.16 

1931 

5885 

Ten-payment  life  

99.33 

19.31 

8002 

Twenty-year  endowment  

72.66 

19.31 

53.35 

Ten-year  endowment    

121.06 

19.31 

101  75 

The  grotesque  absurdity  of  such  loadings  sufficiently 
condemns  the  full  preliminary  term  system,  by  which  is 
meant  the  application  of  preliminary  term  without  modifi- 
cation to  all  forms  of  policies. 

In  1897,  Miles  M.  Dawson,  consulting  actuary,  intro- 
duced a  modification  of  the  preliminary  term  plan,  which 
consists  in  limiting  the  loading  of  the  first  year  on  all 
limited  payment  and  endowment  forms  to  the  amount 
available,  on  a  preliminary  term  basis,  on  the  ordinary 
life  policy.  For  example,  referring  to  the  table  above, 
while  the  gross  premiums  would  vary  on  the  different 
forms  as  indicated,  the  loading  could  in  no  case  exceed 
that  of  the  ordinary  life  policy,  to  wit:  $44.37.  From 
the  balance  of  the  premium  on  limited  payment  and  en- 
dowment forms  the  company  would  put  up  a  reserve  in 
the  first  year,  thus  reducing  the  net  premium  and  increas- 
ing the  loadings  of  subsequent  years.  The  tendency  of 
this  plan  would  be  to  encourage  the  sale  of  ordinary  life 
policies  rather  than  limited  payment  and  endowment  con- 
tracts. Several  modifications  of  "modified  preliminary 
term"  have  been  legalized  in  different  states. 


204  YALE  READINGS  IN  INSURANCE 

The  select  and  ultimate  valuation  method  of  computing 
reserves  was  likewise  suggested  by  Mr.  Dawson  as  a  sub- 
stitute for  modified  preliminary  term.  To  a  correct 
understanding  of  the  system  a  knowledge  of  the  several 
classes  of  mortality  tables  is  necessary. 

Assume,  for  illustration,  that  we  wish  to  ascertain  how 
many  of  100,000  persons,  all  30  years  of  age,  will  die 
within  one  year.  If  to  that  end  we  note  the  history  for 
twelve  months  of  100,000  persons  of  the  age  stated,  who 
have  just  passed  a  rigid  medical  examination  for  life  in- 
surance, we  shall  find  a  much  smaller  number  dying  than 
in  100,000  of  the  same  age  who  were  examined  five  years 
ago,  at  age  25.  If  we  note  the  history  of  both  classes  dur- 
ing the  succeeding  year,  we  shall  find  a  larger  percentage 
of  deaths  in  each  instance  than  in  the  first  year,  and,  as 
before,  a  smaller  percentage  of  deaths  in  the  first  than 
in  the  second  class,  but  the  death  rates  of  the  two  classes 
will  now  be  nearer  together  than  in  the  first  year.  In 
the  third  year,  while  the  death  rate  of  each  class  will  again 
be  higher  than  formerly,  the  difference  between  the  two 
rates  will  again  be  less  than  in  the  second  year.  With 
each  added  year  the  difference  in  death  rates  of  the  two 
classes  will  diminish,  until  ultimately,  after  the  benefit 
of  medical  selection  has  worn  off,  the  two  death  rates  will 
be  theoretically  the  same.  It  is  commonly  assumed  that 
this  stage  will  be  reached  in  five  years. 

Lives  which  have  just  been  selected  by  a  medical  ex- 
amination are  called  select  lives,  and  a  mortality  table 
based  on  the  subsequent  history  of  such  lives  is  called  a 
select  table. 

As  it  is  assumed  that  the  effects  of  medical  selection 
ultimately  disappear,  say  in  about  five  years,  a  mortality 
table  based  on  the  history  of  lives  insured  five  or  more 
years  ago  is  called  an  ultimate  table. 

A  mortality  table  based  on  the  history  of  lives  insured, 
some  within  the  year,  others  within  two  or  three  or  ten 
years  or  more,  is  called  a  mixed  table. 


NET  VALUATION 


205 


The  American  Experience  Table  of  Mortality,  which  is 
in  general  use  in  the  United  States,  is  supposed  to  be  an 
"ultimate  table,"  its  compilation  having  been  based  upon 
the  subsequent  history  of  lives  insured  for  five  years  or 
more.  The  rate  of  mortality  indicated  by  this  table, 
therefore,  is  materially  greater  in  the  first  five  years,  at 
least,  than  that  pertaining  to  select  lives  at  corresponding 
ages.  As  a  basis  for  establishing  a  minimum  standard  of 
valuation  and  for  fixing  a  limitation  of  expenses  in  securing 
new  business,  the  New  York  law  assumes  that  the  mor- 
tality of  select  lives  in  the  first  policy  year  immediately 
following  medical  examination  will  be  50  per  cent,  of  the 
tabular  mortality  of  the  American  Experience  Table;  in 
the  second  year,  65  per  cent.;  in  the  third  year,  75  per 
cent.;  in  the  fourth  year,  85  per  cent.;  in  the  fifth  year, 
95  per  cent.;  and  in  the  sixth  and  subsequent  years,  100 
per  cent.  On  this  basis  smaller  terminal  reserves  will  be 
required  during  the  first  four  years  than  by  the  American 
Experience  Table,  though  they  will  be  the  same  from  the 
fifth  year  on,  as  illustrated  in  the  following  comparison  of 
terminal  reserves  computed  by  the  two  methods  on  an 
ordinary  life  policy  issued  at  age  56. 


Termini 

J  Reserves 

End  of  Year 

American  Ex- 
perience Table 

Select  and 
Ultimate 

First    

$29.90 

$14.41 

Second    

59.94 

50.84 

Third  

90.06 

85.87 

Fourth    

120.21 

119.13 

Fifth  

150.33 

150.33 

Sixth  .  .            

180.36 

180.36 

This  is  the  system  of  select  and  ultimate  valuation  pre- 
scribed by  the  laws  of  New  York  as  a  minimum  standard. 
In  this  standard  the  new  company,  which  might  find  it 


206  YALE  READINGS  IN  INSURANCE 

impracticable  to  put  up  the  net  level  premium  reserves 
in  the  first  and  immediately  succeeding  years,  has  a  sub- 
stantial measure  of  relief.  The  company  collects  during 
the  first  four  years,  as  well  as  thereafter,  the  full  gross 
premium.  The  margin  in  the  first  year's  premium  by  rea- 
son of  the  smaller  reserve  required  —  the  full  reserve  being 
made  up  in  subsequent  years  by  the  saving  in  mortality  - 
is  available  for  other  purposes  and  may  be  anticipated  and 
expended  in  securing  new  business. 


CHAPTER  XV 

POLICY   CONTRACTS1 

LIFE  insurance  practically  had  its  origin  in  a  contract 
between  two  or  more  parties  that  was  in  the  nature  of  a 
wager.  The  pay  or  of  the  premium  would  win  if  the  in- 
sured died  within  a  given  period,  and  the  insurer  would 
win  if  the  insured  survived  such  a  period. 

The  first  record  we  have  of  such  a  life  insurance  contract 
shows  that  it  was  made  June  18,  1583,  in  favor  of  Richard 
Martin,  citizen  and  alderman  of  London.  The  subject 
insured  was  one  William  Gybbons,  and  the  contract  prac- 
tically amounted  to  a  wager  between  Richard  Martin  and 
thirteen  merchants  of  the  city  of  London.  Martin  paid 
the  thirteen  merchants  about  £30.  If  Gybbons  died 
within  twelve  months,  then  the  thirteen  merchants 
agreed  to  pay  about  £400.  While  this  was  a  wager 
transaction,  and  would  now  be  void  in  law,  it  was,  in  a 
manner,  the  beginning  of  life  insurance  contracts. 

A  policy  on  the  life  of  Nicholas  Bourne,  dated  November 
25,  1721,  issued  by  the  London  Assurance  Corporation 
at  the  request  and  expense  of  Thomas  Baldwin,  is  the 
second  authentic  record  we  have  of  an  early  life  insurance 
contract.  An  interesting  feature  of  this  contract  is  that 
it  would  meet  the  necessities  of  the  Second  Adventists, 
whose  considerations  of  life  insurance  are  disturbed  by 
the  prospect  of  being  translated  and  thus  leaving  behind 

1  By  L.  G.  Fouse,  President  of  the  Fidelity  Mutual  Life  Insurance 
Company,  Philadelphia.  Reprinted  with  additions  from  pages  209- 
228,  Volume  XXVI,  Annals  of  the  American  Academy  of  Political  and 
Social  Science. 

207 


208  YALE  READINGS  IN  INSURANCE 

them  no  evidence  of  death.  The  policy  provided  that 
"in  case  he,  the  said  Nicholas  Bourne,  shall  in  or  during 
the  said  time,  and  before  the  full  End  and  Expiration 
thereof,  happen  to  dye,  or  decease  out  of  this  world  by 
any  Ways  or  Means  whatsoever,  That  then  the  above 
said  Governor  and  Company  will  well  and  truly  satisfy, 
content,  and  pay  unto  the  said  Thomas  Baldwin,  his  Ex- 
ecutors, Administrators  or  Assigns,  the  Sum  or  Sums  of 
Money  by  him  Assured,  and  here  underwritten,  without 
any  Allowance,  Deduction,  or  Abatement  whatsoever." 
The  only  condition  of  avoiding  the  contract  was  going  to 
sea  or  into  the  wars  without  written  consent. 

Another  old  contract  of  which  we  have  a  record  is  on  the 
life  of  the  Right  Rev.  William  Carmichael,  Lord  Bishop 
of  Clonfert,  dated  June  27,  1754.  The  insurance  was 
effected  by  and  for  the  benefit  of  George  Cockburne  at 
the  rate  of  $5  premium  for  each  £100  insured.  Suicide, 
or  death  by  the  hands  of  justice,  or  going  outside  of  his 
Britannic  Majesty's  dominions  of  Great  Britain  and  Ire- 
land without  first  obtaining  license  in  writing,  voided  the 
contract. 

A  contract  of  life  insurance  must  now  be  supported  by 
a  legal  insurable  interest.  That  is  to  say,  when  the  insur- 
ance is  effected  by  any  person  other  than  the  insured, 
the  beneficiary  must  have  an  interest  in  the  continuance 
of  the  life  of  the  insured  and  not  merely  a  monetary 
interest  in  his  death. 

While  it  is  not  my  province  to  discuss  the  actuarial  and 
scientific  questions  involved,  it  is  proper  to  say  that  the 
discovery  of  the  law  of  mortality  susceptible  of  mathe- 
matical calculation  made  it  possible  to  supplant  crude 
guesses  at  the  chances  of  life  and  death  by  tables  con- 
structed from  mortality  observations. 

The  contracting  parties  under  the  policy  are  usually 
designated  in  this  country  as  the  insured,  the  subject  upon 
whose  life  the  policy  is  written;  the  insurer,  the  one  who 
assumes  the  obligation  to  pay  the  insurance;  and  the  bene- 


POLICY  CONTRACTS  209 

ficiary,  the  one  to  whom  the  insurance  is  paid  in  the  event 
of  death.  There  are,  therefore,  usually  three  parties  to  a 
policy  contract. 

Individuals  under  modern  methods  do  not  act  as  in- 
surers. The  laws  of  the  several  states  have  provided  for 
the  incorporation  of  insurance  companies  which  have  per- 
petual succession.  Individuals  die,  but  properly  managed 
corporations  are  supposed  to  live  always.  The  powers 
of  a  life  insurance  company  under  the  statute  usually 
consist  of  effecting  insurance  upon  the  lives  of  individuals, 
every  insurance  appertaining  thereto  or  connected  there- 
with, and  the  granting  and  purchasing  of  annuities.  The 
companies  are  authorized  to  make  by-laws  for  their  govern- 
ment not  in  conflict  with  the  laws  and  constitution  of  the 
state  in  which  they  are  incorporated,  or  of  the  United 
States.  Full  liberty  and  freedom  is,  therefore,  vouch- 
safed to  the  life  insurance  company  in  the  making  of 
contracts  with  a  single  requirement  applicable  only  to 
companies  known  as  old  line  or  legal  reserve  companies. 
This  requirement  amounts  to  a  standard  of  safety  adopted 
by  the  state,  which  provides  that  whatever  the  policy  con- 
tract may  be  the  insurance  company  must  always  have 
in  its  coffers  money  or  securities  equal  to  the  difference 
between  the  present  worth  of  what  it  promises  to  pay, 
and  the  present  worth  of  the  net  premiums  the  insured 
promises  to  pay,  which  difference  is  known  as  the  reserve. 
Beyond  this  the  state  wisely  does  not  undertake  to  inter- 
fere with  or  handicap  the  companies.  While  this  lati- 
tude of  license  has  probably  in  a  degree  been  abused,  it 
has  given  the  public  a  great  variety  of  policy  contracts 
from  which  to  select;  and  as  the  insuring  public  is  becom- 
ing better  informed  and  able  to  discriminate  between  the 
sound  and  unsound,  such  latitude  or  license  is  becoming 
less  objectionable.  Indeed,  by  reason  of  the  ever  chan- 
ging conditions  it  is  infinitely  to  be  preferred  to  any 
attempt  at  circumscribing  legal  limitations  to  policy  con- 
tracts. 


210  YALE  READINGS  IN  INSURANCE 

The  word  policy  means  in  general  a  course  or  plan  of 
action  or  administration.  During  the  Middle  Ages  it  was 
used  to  designate  memoranda.  In  England  it  has  been 
applied  to  "a  warrant  or  ticket  for  money  in  the  public 
funds."  In  the  United  States  it  is  applied  to  a  gambling 
game.  Among  these  varied  definitions  and  uses  has 
arisen  its  universal  employment  to  designate  compre- 
hensively a  written  instrument  embodying  a  contract  of 
insurance  involving,  as  it  does,  contingencies  and  proba- 
bilities. In  life  insurance  a  policy  contract  is,  therefore, 
one  involving  the  contingency  of  death,  in  which  the 
minds  of  the  parties  thereto  have  met  and  agreed  upon 
the  terms  and  conditions  of  the  underwriting. 

The  taking  out  of  a  policy  of  life  insurance  signifies 
a  sense  of  responsibility,  frugality,  and  thrift  on  the  part 
of  its  owner.  Under  existing  social  and  economic  con- 
ditions the  life  insurance  contract  has  become  a  necessity. 
The  man  who  assumes  the  responsibility  of  a  family  and 
of  engaging  in  business  needs  protection,  in  the  event  of 
his  early  death,  for  both.  The  insured  or  owner  of  the 
contract  often  derives  substantial  benefit  from  the  self- 
denial  and  formation  of  the  frugal  habits  acquired  by  the 
preparation  to  meet  the  periodical  payment  of  premiums. 
He  is  also  benefited  by  the  consciousness  that  he  is  creat- 
ing an  estate  to  benefit  his  dependents,  which,  in  the  event 
of  his  death,  becomes  immediately  convertible  into  cash 
without  the  intervention  of  administrator,  executor,  or 
attorney.  It  is  generally  conceded  by  the  trust  officers 
of  our  great  trust  companies  that  there  are  no  securities 
left  by  decedents  of  as  great  general  value,  because  of  not 
being  affected  by  market,  etc.,  as  are  policies  of  life  insur- 
ance. It  is  only  in  cases  of  gross  fraud  or  where  the  rights 
of  beneficiaries  are  disputed  that  any  contest  is  made  by 
the  companies.  For  example;  according  to  the  sworn 
returns  of  1902  and  1903  the  total  existing  contested 
claims,  representing  an  accumulation  of  years,  amounted 
to  only  $668,200,  while  the  claims  paid  during  the  same 


POLICY  CONTRACTS  211 

years  by  the  legal  reserve  companies  represented  $367,- 
035,413.  Thus  the  accumulated  contests  represented  only 
one-fifth  of  1  per  cent,  of  the  amount  of  claims  paid  in  two 
years;  or  for  every  $1000  paid,  only  $2  were  contested, 
and  it  is  safe  to  say  that  currently  not  more  than  $1  out 
of  every  $1000  paid  is  contested. 

For  the  beneficiaries  of  such  contracts  it  signifies  the 
means  of  support  after  the  decease  of  the  breadwinners; 
it  means  escape  from  the  pittances  or  charities  of  the 
world. 

To  the  state  life  insurance  signifies  a  much  reduced  poor 
rate  for  the  maintenance  of  almshouses  and  eleemosynary 
institutions. 

Motives  in  Framing  Contracts.  —  In  order  to  get  at  the 
motives  we  will  take  up  the  considerations  involved  in 
the  framing  of  a  policy  contract.  It  is,  no  doubt,  true 
that  policies  have  been  framed  with  temporary  success, 
having  quick  returns  to  the  managers  as  the  principal 
consideration;  schemes  could  be  cited  in  illustration  of 
this  statement.  I  shall,  however,  not  undertake  to  cope 
with  or  discuss  dishonest  schemes,  but  shall  address  my- 
self to  the  difficulties  involved  under  honest  and  legitimate 
projects. 

The  consideration  of  first  importance  is  so  to  frame  the 
contracts  as  to  perpetuate  the  existence  of  the  corporation. 
To  this  end  due  consideration  must  be  given  to  equity  and 
justice,  and  to  protection  against  dishonesty  and  fraud. 

A  policy  may  be  loaded  down  with  unnecessary  restric- 
tions. In  the  earlier  days  of  life  insurance,  when  obser- 
vations had  not  been  made  of  the  various  supposedly 
hazardous  conditions,  it  was  attempted  to  avoid  them  by 
policy  restrictions.  Many  of  these  have  been  found  to 
be  unnecessary.  Some  of  them  are  needed,  and  in  a  modi- 
fied form  should  be  retained  in  the  interest  of  a  sound, 
wholesome  public  policy  and  of  equity  to  all  policy-holders. 

While  the  motives  involved  in  business  getting  cannot 


212  YALE  READINGS  IN  INSURANCE 

wholly  be  ignored,  they  must  be  subordinated  to  the  rules 
of  good  business,  sound  public  policy,  equity  and  justice. 
It  will  not  do  for  those  who  have  the  framing  of  a  policy 
contract  to  "play  to  the  galleries"  by  a  show  of  liberality, 
and  thus  secure  public  applause  at  the  expense  of  policy- 
holders. 

The  beginning  of  a  policy  contract  is  a  proposal  in  the 
form  of  an  application  for  life  insurance.  In  such  applica- 
tion the  applicant  is  required  to  make  a  detailed  statement 
of  his  personal  and  family  history,  and  such  state- 
ments are  usually  made  the  basis  of  the  contract.  If  the 
insured  makes  material  misstatements,  he  is  very  much 
in  the  same  moral  position  as  any  one  who  obtains  a  thing 
of  value  under  false  pretenses.  Banks,  business  and  manu- 
facturing concerns,  and  individuals  alike  are  protected  under 
the  laws  against  that  class  of  people  who  do  not  hesitate 
to  indulge  in  false  pretenses.  Notwithstanding  these  gen- 
eral facts,  in  some  states  life  insurance  companies  have 
practically  no  protection.  An  applicant  in  such  states 
may,  with  malice  aforethought,  misrepresent  a  material 
fact,  and  because  of  a  prejudiced  and  pernicious  public 
sentiment,  which  has  invaded  the  courts  of  justice,  the 
insurance  management  will  sometimes  pay  rather  than 
take  the  chances  of  greater  loss  in  contesting  a  claim 
believed  to  be  fraudulent.  At  best  the  binding  obligations 
are  all  on  the  company,  and  both  the  insurance  depart- 
ments and  the  courts  stand  ready  to  enforce  them,  while 
the  insured  may  at  will  discontinue  the  contract. 

The  public  sentiment  of  which  I  have  spoken  largely 
ignores  the  fact  that  insurance  is  effected  by  the  money 
of  the  policy-holders  of  the  company;  that,  literally,  the 
policy-holders  are  the  company,  and  the  officers  are  merely 
the  managers.  It  is  in  part  due  to  a  condition  which 
obtained  after  the  Civil  War  in  the  seventies,  when  many 
companies  were  organized  by  men  who  knew  absolutely 
nothing  of  the  science  of  underwriting,  and  whose  num- 
berless blunders  forced  them  to  the  last  expedient  of  try- 


POLICY  CONTRACTS  213 

ing  to  perpetuate  the  existence  of  their  companies  by 
evading  the  paying  of  claims.  While  these  companies 
ceased  to  exist  many  years  ago,  and  while,  if  anything, 
the  companies  at  present  err  on  the  side  of  liberality 
and  promptness,  the  sentiment  referred  to  remains  in 
a  modified  form. 

The  application  should  and  usually  does  contain  a  war- 
ranty clause  in  which  the  applicant  warrants  the  truth  of 
his  statements  that  form  the  basis  of  the  contract.  If  any 
material  statements  therein  are  found  to  be  untrue,  then 
the  contract,  according  to  its  terms,  may  be  voidable  or 
become  ipso  facto  null  and  void,  and  all  payments,  except 
as  expressly  provided  therein,  are  forfeited  to  the  company. 
The  rule,  however,  is  to  make  the  policies  incontestable, 
except  for  the  non-payment  of  premiums,  after  from  one 
to  two  years  following  the  date  of  issuance.  Under  the 
head  of  policy  restrictions  I  discuss  in  some  detail  the  in- 
contestable clause. 

Before  execution  of  a  policy  contract  the  medical  and 
inspection  departments  of  the  company  carefully  investi- 
gate the  statements  made  by  the  applicant.  They  deter- 
mine whether  the  applicant  is  insurable,  and  if  so  under 
what  conditions.  The  applicant's  financial  ability  to  pay 
the  premiums  is  also  considered.  Upon  proper  certifica- 
tion the  executive  department  executes  the  contracts. 
The  policy,  however,  as  a  rule,  does  not  become  binding 
or  operative  until  delivery  to  the  applicant  and  acceptance 
by  him  during  his  lifetime  and  good  health,  and  the  actual 
payment  of  the  required  premium. 

The  title  to  the  policy  may  vest  in  the  insured  or  in  the 
beneficiary,  depending  upon  the  terms  and  conditions  of 
the  contract.  If  the  insured  under  the  terms  of  the  con- 
tract has  the  right  to  change  the  beneficiary,  then  the 
latter  has  a  contingent  interest  only,  which  does  not  be- 
come vested  until  after  the  death  of  the  insured.  Hence, 
under  such  a  contract  the  title  vests  in  the  insured  because 
he  can,  at  any  time,  substitute  his  own  estate  or  another 


214  YALE  READINGS  IN  INSURANCE 

beneficiary  for  the  one  originally  named.  If,  however, 
under  the  terms  of  the  contract  the  insured  cannot  change 
the  beneficiary,  then  the  title  to  the  policy  vests  in  the  latter 
and  can  only  be  transferred  to  another  by  assignment. 

Under  the  laws  of  most  of  the  states  a  policy  of  life 
insurance,  made  payable  to  wife  and  children,  is  not  liable 
for  the  debts  of  the  insured,  and  hence,  though  the  insured 
may  be  insolvent  at  the  time  of  death,  the  creditors  can- 
not get  any  part  of  the  insurance  money  unless  it  can  be 
shown  that  the  policy  was  contracted  for  after  insolvency 
and  that  the  contract  was  made  to  avoid  the  payment  of 
debts  and  to  defraud  creditors. 

A  life  policy  is  not  consummated  or  completed  until  it 
either  expires  by  limitation  or  by  maturity  at  the  end  of 
a  stated  period,  or  by  the  death  of  the  insured.  In  the 
last  event  proof  of  death  and  of  claim,  as  required  by  the 
contract,  must  be  made  to  the  company.  While  many 
policies  provide  for  the  payment  of  the  money  within  a 
limit  of  thirty  or  sixty  days,  it  has  become  the  custom  of 
practically  all  the  companies  to  pay  the  insurance  money 
as  soon  as  satisfactory  proof  of  loss  and  claim  has  been 
made. 

It  is  an  established  principle  of  the  law  courts  to  con- 
strue contracts  against  the  framers  or  makers,  on  the 
ground  that  they  are  familiar  with  the  technicalities  of 
the  law,  and  are  presumed  to  frame  the  contracts  in  their 
own  interest. 

In  construing  contracts,  in  case  of  apparent  conflict 
between  written  and  printed  clauses,  preference  is  always 
given  to  the  written  clauses. 

Notwithstanding  the  disposition  of  juries  to  favor  indi- 
vidual claimants  against  corporations,  and  the  disposition 
of  the  courts  to  construe  the  contracts  against  the  makers, 
it  is  a  fact  worthy  of  note  that  more  than  75  per  cent,  of 
the  litigated  cases  are  won  by  the  companies.  This  is 
due  to  the  further  fact  that  the  companies  will  only  resort 
to  a  contest  in  most  flagrant,  fraudulent  cases. 


POLICY  CONTRACTS  215 

Variety  of  Life  Contracts  due  to  Method.  —  There  are 
four  methods  legally  recognized  and  mentioned  under  this 
section,  each  of  which  has  its  distinctive  features.  The 
distinctions  between  the  methods  are  legal,  mathematical, 
practical  and,  in  part,  due  to  prejudice  and  custom.  Be- 
cause of  the  distinctions  mentioned,  the  form  of  contract 
adapted  to  one  method  would  not  be  suited  to  another 
method.  This  has  given  rise  to  a  much  larger  variety  of 
policy  contracts  in  life  insurance  than  we  should  have  if 
there  were  but  one  method.  While  the  system  of  life 
insurance  may  be  said  to  be  one,  the  methods  are  many. 

Ordinary  Legal  Reserve  Methods.  —  This  comprehends 
the  classification  of  companies  which  are  by  law  required 
to  maintain  a  reserve  at  all  times  equal  to  the  future  de- 
ficiency in  the  premiums,  so  that  the  fulfilment  of  the  policy 
obligations  is  guaranteed.  There  are  probably  as  many 
as  one  hundred  and  fifty  different  varieties  of  policies  issued 
by  companies  of  this  classification.  It  would  be  imprac- 
ticable to  attempt  to  enumerate  them  all,  but  I  will  men- 
tion the  principal  policies : 

1.  The  Ordinary  or  Whole-Life  Participating  Policy.  — 
Premiums  continuous  during  the  life  of  the  insured;   divi- 
dends applied  to  reducing  premiums  or  increasing  the 
insurance;   insurance  payable  at  death  only. 

2.  Limited  Payment  Participating  Policy.  —  Premiums 
limited  to  a  term  of  years;  dividends  as  in  (1),  or  payable 
in  cash  at  the  end  of  the  term;  insurance  payable  at  death 
only. 

3.  Endowment  Participating  Policy.  —  Premiums   pay- 
able during  the  specified  term;    dividends  as  in  (2);    in- 
surance is  payable  at  the  end  of  years  specified  or  at  death 
if  prior. 

4.  Non-Participating  Policy.  —  All  of  the  several  forms 
mentioned  are  issued  at  a  low  rate  of  premiums  in  lieu  of 
dividends. 

In  addition  to  the  several  forms  of  policies  referred  to 
there  may  be  mentioned  joint  life  or  partnership,  renew- 


216  YALE  READINGS  IN  INSURANCE 

able  term,  term,  instalment,  single  premium  or  paid-up, 
tontine,  semi-tontine,  and  a  great  variety  of  deferred  divi- 
dend policies  variously  designated  as  accumulation,  allot- 
ment, survivorship  dividend,  tontine  dividend,  etc. 

Industrial  Legal  Reserve  Method,  —  The  variety  is  prac- 
tically limited  to  the  standard  life  and  limited  payment 
policies  at  premium  rates  considerably  in  excess  of  those 
charged  by  the  ordinary  legal  reserve  companies.  This 
excess  is  due  to  the  fact  that  the  companies  issuing  indus- 
trial policies  collect  the  premiums  weekly  —  sometimes 
monthly  —  by  collectors  who  go  from  house  to  house. 
By  reason  of  the  large  premium  charged,  policies  of  the 
industrial  variety  contain  but  few  restrictions. 

Fraternal  or  Lodge  Method.  —  These  contracts  are  in  the 
form  of  certificates  of  membership,  and  usually  provide 
for  suspension  of  a  lodge  in  case  payment  is  not  made  by 
the  subordinate  branches  to  the  supreme  body.  Although 
the  individual  member  may  pay  his  dues  and  assessments 
promptly,  if  the  lodge  to  which  he  belongs  fails  to  pay  he 
must  suffer  suspension.  The  rights  of  the  individuals  are 
subordinated  to  the  conduct  and  will  of  the  majority. 

The 'contracts  usually  specify  a  maximum  benefit,  and 
are  not  in  a  legal  sense  guaranteed  beyond  the  proceeds 
of  the  assessments  collected  from  the  lodges  to  pay  the 
losses.  The  variety  is  usually  limited  to  certificates  in 
which  payments  of  the  member  continue  during  the  life 
of  the  contract. 

As  a  rule  very  few  restrictions  are  imposed. 

Assessment  or  Non-Legal  Reserve  Method.  —  Under  this 
method  provision  is  made  to  effect  the  insurance  by  cur- 
rently collecting  from  the  members  a  specified  or  deter- 
minable  amount  to  be  paid  periodically.  Originally  this 
form  of  contract  usually  specified  that,  in  the  event  of  the 
death  of  the  insured,  the  beneficiary  should  receive  the 
proceeds  of  an  assessment  not  exceeding  a  maximum  sum 
specified.  Later  the  form  was  modified  so  that  the  sum 
payable  at  death  should  be  fixed  and  certain,  while  the 


POLICY  CONTRACTS  217 

amounts  to  be  collected  from  members  become  variable 
and  uncertain,  depending  upon  the  mortality  experienced. 
The  variety  is  limited  to  the  type  of  policies  not  requiring 
large  accumulations  for  their  fulfilment,  and  under  which 
the  payments  of  the  insured  are  coterminous  with  the 
life  of  the  policy.  The  restrictions  and  conditions,  with 
the  exception  of  the  non-forfeitable  and  accumulation 
features,  are  in  effect  the  same  as  in  the  policies  of  the 
legal  reserve  class. 

The  truth  of  the  statements  contained  in  the  applica- 
tion must  be  a  condition  precedent  to  the  issuance  of  the 
policy.  The  payment  of  the  premiums  when  due  is  funda- 
mental to  the  continuance  of  the  insurance.  Provision 
is  generally  made  for  the  revival  of  the  policy  in  case  of 
default  in  the  payment  of  the  premium  if  the  insured  be 
in  good  health.  The  requirement  of  legal  and  proper 
proof  that  the  contingency  insured  against  has  happened 
is  also  fundamental.  The  company  that  will  pay  a  policy 
without  due  and  proper  proof  of  death  and  claim  is  rec- 
reant to  its  trust. 

Sound  public  policy  limits  the  insurable  ages  to  the 
productive  period  of  life,  and  requires  policies  to  be  non- 
forfeitable for  any  payments  in  excess  of  the  current  cost 
of  insurance,  allowing  the  companies  a  small  margin  for 
contingencies.  It  demands  a  clear  and  distinct  statement 
of  the  respective  rights  of  the  parties  to  the  contract  with 
reference  to  the  division  and  disposition  of  surplus.  It 
requires  policies  to  become  incontestable  within  a  reason- 
able time  from  date  of  issuance,  except  for  failure  to  pay 
premiums  when  due,  and  imposes  restrictions  in  the  inter- 
ests of  the  general  public,  such  as  will  discourage  and  pre- 
vent fraud  and  crime.  Suicide,  which  will  be  discussed 
under  policy  restrictions,  is  an  important  feature  of  life 
insurance  as  related  to  public  policy. 

Conditions  imposed  by  equitable  considerations  require 
the  policies  which  have  been  issued  to  be  kept,  as  nearly 
as  practicable,  in  the  same  classification  of  hazards.  If 


218  YALE  READINGS  IN  INSURANCE 

the  insured  voluntarily  assumes  a  hazard  known  to  be 
great,  and  not  originally  contemplated  in  his  contract, 
the  burden  of  it  must  either  be  borne  by  himself  or  by  other 
policy-holders.  Equitable  considerations  require  that  every 
insured  should  bear  his  just  proportion  of  such  burdens. 
Hence  in  the  case  of  military  and  naval  service  during 
time  of  war  the  extra  premium  involved  by  the  war  hazard 
should  either  be  paid  by  the  government  served,  or  by  the 
insured,  or  the  policy  should  be  proportionately  scaled. 
Equitable  considerations  also  demand  that  an  extra  pre- 
mium should  be  imposed  on  persons  who  reside  or  travel 
in  certain  portions  of  the  tropics  where  the  death  rate  is 
fully  twice  as  great  as  that  upon  which  the  premiums  are 
based.  A  further  and  very  important  consideration,  but 
much  neglected,  is  that  every  policy  should  be  made  to 
pay  its  own  way,  including  the  expenses  of  writing  and 
placing  it.  The  policy  should  be  so  constructed  that  the 
premium  loading  the  first  policy  year  is  sufficient  to  pay 
the  expenses,  and  the  loading  in  the  subsequent  policy 
years  should  be  correspondingly  reduced.  The  surplus 
belonging  to  those  already  insured  should  be  apportioned 
to  them,  and  should  not  be  diverted  to  the  payment  of 
expenses  incident  to  obtaining  new  business. 

In  a  great  many  policy  contracts  conditions  and  re- 
strictions are  referred  to  as  privileges.  This  use  of  the 
word  privilege  is  rather  difficult  to  reconcile  with  the  gen- 
eral proposition  of  law  that  that  which  is  not  prohibited 
and  comes  within  the  purpose  of  the  corporation  is  per- 
mitted. Therefore,  unless  a  policy  contract  first  limits  and 
circumscribes,  there  is  absolutely  no  significance  to  privi- 
leges. For  example,  to  say,  when  there  is  no  limitation 
as  to  travel,  that  the  insured  has  the  privilege  of  traveling 
or  residing  in  any  part  of  the  known  world  signifies  abso- 
lutely nothing,  as  that  privilege  is  granted  by  its  not 
being  prohibited. 

It  may,  therefore,  be  accepted  as  a  guiding  principle  that 
within  the  limits  of  the  powers  of  the  maker  of  the  con- 


POLICY  CONTRACTS  219 

tract,  whatever  is  not  restricted,  forbidden,  or  prohibited 
is  a  privilege  implied  although  not  expressed. 

I  have  classified  the  important  conditions  and  restric- 
tions of  fifty-one  companies.  These  companies  are  re- 
presentative, and  the  result  of  the  classification  clearly 
indicates  the  principal  policy  conditions  among  the 
American  life  insurance  companies : 

1.  Only   eleven   of   the   fifty-one   companies   formally 
announce  accepting  risks  over  sixty. 

2.  Thirty-seven  accept  women  on  the  same  conditions 
as  men;  thirteen  require  extra  premiums  or  restrict  them 
to   certain  policies,  and   one  company  refuses  to  insure 
them. 

3.  Thirty-eight  companies  voluntarily  attach  copy  of 
application  to  the  policy,  thus  giving  to  the  insured  a 
complete  contract,  and  thirteen  only  do  so  when  required 
or  when  the  law  requires  it. 

4.  All  companies  have  a  provision  in  the  policy  that 
it  shall  not  become  effective  and  binding  until  delivered 
during  the  lifetime  and  good  health  of  the  insured  and 
after  the  required  premium  is  actually  paid. 

5.  Seventeen  have  no  restrictions  with  regard  to  occu- 
pation after  the  policy  has  once  been  issued;  eight  have  a 
restriction  imposing  a  penalty  if  the  insured  engages  in 
a  more  hazardous  occupation  than  the  one  stated  in  the 
application;   twenty-six  have  restrictions  limited  by  some 
to  the  first  policy  year  and  others  to  the  first  two  policy 
years. 

6.  Thirty-five  companies  have  restrictions  in  regard  to 
military  and  naval  service  in  time  of  war,  requiring  a 
permit  for  which  an  extra  premium  must  be  paid  or  pro- 
viding for  the  scaling  of  policies;    six  have  such  restric- 
tion for  either  one  or  two  policy  years  and  ten  have  no 
restriction. 

7.  Nineteen  have  a  suicide  clause  for  one  year;  twenty- 
five  for  two  years;    three  for  three  years;    one  without 
limitation,  and  three  have  no  restriction. 


220  YALE  READINGS  IN  INSURANCE 

8.  In  the  matter  of  dueling  and  violating  law  thirty 
have  no  restrictions;   six  have  them  for  one  year;   twelve 
for  two  years;    two  for  three  years,  and  one  constant. 

9.  Forty-two  have  no  provision  against  intemperance; 
two  have  it  for  one  year;  four  for  two  years;  one  for  three 
years;   two  for  five  years,  and  one  constant. 

10.  Twenty-four  companies  have  no  restriction  as  to 
residence  and  travel;   nine  have  it  for  one  year;   fourteen 
for  two  years,  and  four  constant. 

11.  Two  companies  have  no  incontestable  clause;   two 
stipulate  incontestability  from  date  of  issue;    seventeen 
after  one  year;   twenty-seven  after  two  years;   two  after 
three  years,  and  one  after  five  years. 

12.  The  policies  of  nine  companies  provide  for  no  days 
of  grace  for  payment  of  premium;  those  of  forty-one  com- 
panies provide  thirty  days,  and  one  company'  six  days. 

13.  Fourteen  companies  make  no  provision  in  policies 
for  reinstatement  or  revival  in  the  event  of  lapse,  but 
reinstate  merely  as  a  matter  of  grace;   sixteen  companies 
make  it  a  matter  of  contract  without  limiting  the  time; 
ten  limit  within  a  year;  three  two  years;  two  three  years; 
six  five  years. 

14.  All  companies  have  some  non-forfeiture  provision 
after  two  or  three  years  by  way  of  loan,  or  paid-up  or 
extended  insurance;    four  provide  cash  surrender  values 
after  two  years;   twenty-nine  three  years;   six  five  years; 
eight  at  periods  specified  in  the  contract;    four  no  cash 
surrender  values. 

15.  Six   companies   pay   dividends   annually;    six   an- 
nually after  the  second  year;  four  annually  after  the  third 
year;  four  annually  after  specified  periods;  nine  annually 
after  five  years;    twenty-two  at  stated  periods  or  divi- 
dends deferred. 

16.  Forty-four  companies  provide  for  the  payment  of 
claims  immediately  after  the  receipt  and  approval  of  proofs 
of  death,  and  seven  specify  payment  within  thirty  or  sixty 
days  after  proof. 


POLICY  CONTRACTS  221 

I  will  consider  the  classes,  as  given  in  the  above  classi- 
fication, in  numerical  order : 

1.  Insurance,  as  a  matter  of  protection,  should  be  limited 
to  the  productive  period  of  life,  or  to  between  ages  15 
and  70.    If  an  aged  man  applies  for  insurance,  and  pays 
the  premiums  himself  as  a  means  of  investment  and  a 
method  of  increasing  his  estate,  then  there  is  no  special 
reason  for  limiting  the  age  on  the  level  premium,  or  reserve 
method,    of    life   insurance.     Unfortunately,    however,    a 
great  many  aged  persons  have  allowed  themselves  to  be 
used  as  subjects  for  speculation.    The  astonishing  part 
is  that  a  selfish,  unnatural,  and  depraved  desire  should 
sometimes  develop  on  the  part  of  sons,  daughters,  and 
sons-in-law  to  insure  their  fathers  and  mothers  under  the 
assessment  or  cheaper  method  in  the  hope  of  financial 
gain  from  a  speedy  death. 

Between  the  years  1880  and  1884,  in  the  State  of  Penn- 
sylvania, upward  of  two  hundred  assessment  associations 
were  organized  for  the  purpose  of  speculating  in  aged 
human  lives.  Through  the  efforts  of  the  legitimate  life 
insurance  companies  and  associations,  the  pulpit,  the  press, 
and  the  bench,  public  conscience  was  awakened,  and  a 
law  was  passed  in  1883  which  put  the  speculators  in  human 
life  and  the  organizations  through  which  they  operated 
out  of  business  within  a  year.  This  chapter  in  the  history 
of  life  insurance  has  resulted  in  the  refusal  by  most  com- 
panies to  insure  persons  over  the  age  of  sixty  unless  the 
policy  be  of  the  investment  type,  and  the  further  refusal 
to  issue  a  policy  if  any  person  other  than  the  insured  seeks 
to  effect  the  insurance  or  to  pay  the  premiums. 

A  man  under  proper  policy  conditions  cannot,  and 
would  not  if  he  could,  speculate  on  his  own  life,  and  there- 
fore, when  he  himself  furnishes  the  money  to  pay  the 
premiums  the  transaction  is  legitimate  at  any  age  and  free 
from  the  suspicion  of  speculation. 

2.  Repeated  mortality  investigations  have  established 
beyond  any  question  of  doubt  that,  when  the  speculative 


222  YALE  READINGS  IN  INSURANCE 

and  moral  hazards  are  eliminated,  women  are  as  good 
risks  as  men,  if  not  better. 

While  there  are  still  companies  which  charge  women  an 
extra  premium  of  about  $5  per  $1000  insurance  yearly, 
most  of  the  companies  overcome  the  hazards  by  limiting 
the  beneficiaries  to  minor  children  and  dependents.  Such 
companies  have  had  a  satisfactory  experience  in  insuring 
women. 

3.  Twenty-four  years  ago  the  Commonwealth  of  Penn- 
sylvania enacted  a  law  requiring  a  copy  of  the  application, 
or  any  instrument  referred  to  in  the  policy  as  a  part  of  the 
contract,  to  be  attached.     Other  states  have  done  the  same. 
This  is  a  wise  and  proper  provision  and  is  being  carried 
out  voluntarily  by  many  companies  in  states  where  it  is 
not  required.    This  law  and  practice  are  the  outcome  of 
litigation.    In  cases  of  contest  claimants  frequently  have 
not   learned   until  coming  into  court  that   a   breach   of 
warranty  actually  existed.    It  is  true,  however,  that  no 
company  would   have  refused  claimants  a  copy  of  the 
application  prior  to  litigation;  and  it  is  also  true  that  the 
knowledge  of  the  contract  given  by  the  attached  copy  of 
the  application  does  not  deter  ambitious  attorneys  from 
attempting  to  enforce  payment  of  claim  even  in  case  of 
material  breach  of  warranty. 

4.  The  provision  in  all  policies,   that  they  shall  not 
become  binding  until  delivery  during  the  lifetime  and  good 
health  and  upon  actual  payment  of  premium,  has  become, 
under  the  methods  in  vogue,  an  absolute  necessity.    Courts 
have  even  held  that  in  the  event  of  a  change  in  the  physi- 
cal condition  of  the  applicant  between  the  date  of  appli- 
cation and  the  delivery  of  the  contract  the  warranty  is 
continuous,  and  that  it  is  the  duty  of  the  applicant  to  give 
notice  to  the  company  of  the  changed  conditions  before 
accepting  the  contract. 

Where  no  consideration  has  passed,  where  the  agent 
has  not  given  a  binding  receipt  to  put  the  policy  in  force 
as  soon  as  the  risk  is  accepted  by  the  company,  such  de- 


POLICY  CONTRACTS  223 

cisions  as  referred  to  seem  just  and  right.  The  applicant 
for  insurance,  until  he  has  actually  made  payment  of  the 
premium,  is  in  a  position  to  temporize  and  procrastinate. 
He  often  does  so,  and  as  a  matter  of  justice  his  delay  should 
be  at  his  own  risk  and  not  at  that  of  policy-holders. 

5.  Restrictions  with  reference  to  occupations  have  been 
materially  modified  or  entirely  dispensed  with  during  the 
last  two  decades.    All  companies  at  the  inception  of  the 
contract  take  into  account  the  hazards  of  occupations  and 
impose  conditions  or  rates  to  cover  them,  but  it  is  so  rare 
for  men  to  change  from  less  to  more  hazardous  occupa- 
tions that  the  majority  of  the  companies,  especially  after 
the  first  policy  year,  have  removed  all  restrictions,  and  this 
is  particularly  true  under  deferred  dividend  policies. 

6.  It  has  often  been  said,    "In  time  of  peace  prepare 
for  war."    The  long  continued  peace  seems  to  have  im- 
pressed a  number  of  companies  with  the  idea  that  there 
is  no  need  of  being  prepared  for  war.    Such  companies 
have  removed  all  restrictions  with  reference  to  military 
and  naval  service.    In  the  statistics  of  war  hazards  there 
is  no  justification  for  doing  this.    In  the  late  Civil  War, 
as  well  as  in  European  wars  a  generation  or  more  ago, 
the  proportion  of  the  insured  to  the  general  population 
was  so  small  as  to  produce  no  serious  result  to  the  com- 
panies,  even   if   they   had   no   policy  restrictions.    This 
condition  has  been  changed;    about  one-half  of  the  male 
population  is  now  carrying  insurance  of  some  kind.    In 
case  of  a  general  or  extensive  war  the  companies  without 
restrictions  might  be  wiped  out  of  existence  by  a  few 
battles.    Hence,  the  removal  of  all  restrictions  is  simply 
liberality  gone  mad.    The  people  who  insist  on  having 
a  "wide-open"  policy  should  realize  that  in  several  re- 
spects there  is  great  peril  and  danger  to  them  in  such  a 
policy. 

It  was  my  privilege,  in  the  capacity  of  consulting  actuary 
for  the  Army  Officers'  Association,  to  review  the  records 
of  the  United  States  War  Department,  from  the  institu- 


224  YALE  READINGS  IN  INSURANCE 

tion  of  the  department  to  the  year  1893.  From  these 
records  tables  were  constructed  showing  the  war  hazards 
as  well  as  the  mortality  in  military  life.  As  a  result  I 
reached  the  conclusion  that  a  company  which  entirely 
eliminates  restrictions  in  time  of  war  is  recreant  to  its 
trust. 

The  clause  in  the  policies  with  reference  to  military 
and  naval  service  in  time  of  war  has,  as  a  rule,  been  con- 
structed on  such  equitable  and  reasonable  lines  as  to 
render  it  unobjectionable.  A  clause  which  seems  to  me 
to  be  the  most  desirable  is  that  which  provides  for  the 
payment  of  an  extra  premium  and  a  permit,  and  in  the 
absence  of  the  same  provides  for  the  scaling  of  the  policy 
in  the  proportion  of  the /war  mortality  to  the  tables  upon 
which  the  premiums  are  based. 

It  is  quite  possible  that  with  the  increase  of  the  insured 
population,  in  lieu  of  subsequently  pensioning  the  widows 
of  deceased  soldiers,  on  declaring  war  the  government 
might  make  provision  for  the  payment  of  the  extra  war 
hazard  premiums  of  the  insured  who  enlist.  The  details 
of  such  a  scheme  could  be  worked  out  satisfactorily. 

7.  It  has  been  assumed  that  a  sane  person  will  not 
commit  suicide,  and  that  therefore  it  should  not  be  made 
a  defense  to  a  claim  under  the  terms  of  the  policy.  This 
assumption  has  again  and  again  been  demonstrated  to  be 
a  fallacy.  While  a  certain  proportion  of  suicides  are  no 
doubt  irresponsible,  the  great  majority  are  rational  and 
thoroughly  conscious  of  what  they  are  doing.  The  proof 
of  this  lies  in  the  statistical  fact  that  companies  and  so- 
cieties which  have  no  suicide  clause  in  the  first  few  policy 
years  have  had  from  three  to  fivefold  greater  percentages 
of  deaths  by  suicide  than  they  have  had  in  subsequent  years. 
It  is  true  that  the  deaths  have  not  always  been  designated 
as  suicidal,  but  the  remarkable  fact  remains  that  the  so- 
called  accidental  deaths  have  been  much  greater  in  the 
first  than  in  subsequent  policy  years.  If  this  is  not  due 
to  a  conscious  selection  against  the  companies,  then  how 


POLICY  CONTRACTS  225 

else  can  it  be  accounted  for?  Again,  some  of  the  fraternal 
societies  which  have  had  no  suicide  provision,  by  adopting 
such  a  clause  materially  reduced  the  per  cent,  of  suicides. 

It  is  exceedingly  difficult,  in  cases  where  suicide  is  sus- 
pected, to  get  the  true  cause  of  death  properly  stated  in 
the  proofs  of  loss  and  claim.  Suicide  at  once  becomes  a 
sort  of  stigma  upon  the  immediate  family,  and  because  of 
this  and  because  a  frank  and  honest  admission  might 
defeat  the  recovery  of  insurance,  every  means  is  resorted 
to  to  conceal  the  true  cause  of  death. 

In  the  interest  of  good  morals  and  the  elevation  of  the 
human  race  every  policy  of  life  insurance  for  at  least  the 
first  two  years  should  impose  a  penalty  for  death  by 
suicide. 

8.  The  restrictions  with  reference  to  dueling  and  vio- 
lating law,  or  death  by  the  hand  of  justice,  have  either 
been  entirely  removed  or  so  modified  as  practically  to 
amount  to  nothing.    Happily,  dueling  is  now  regarded 
as  an  act  of  cowardice  instead  of  bravery,  and  it  is  so  sel- 
dom resorted  to  for  the  settlement  of  disputes  or  for  the 
defense  of  honor  as  to  make  its  elimination  from  the  life 
insurance  contract  entirely  practical.    There  is,  however, 
a  form  of  violation  of  law  which  has  become  quite  serious 
in  some  states,  and  for  which  no  remedy  has  been  found. 
I  refer  to  the  feuds  as  a  result  of  which  a  number  of  policy- 
holders  have  been  murdered  in  cold  blood  at  the  expense 
of  other  policy-holders  who  had  no  part  in  the  feuds. 
Indeed,  there  are  sections  of  our  country  where  the  life 
companies  for  a  time  found  it  necessary  to  decline  to  do 
business.     Feuds  create  conditions  that  cannot  be  met 
by  policy  restrictions. 

9.  The  great  care  exercised  by  the  companies  generally 
in  the  selection  of  risks,  excluding  all  persons  of  question- 
able habits,  renders  a  policy  clause  against  intemperance 
practically  of  no  value.    This  is  why  a  large  proportion 
of  the  companies  have  no   provision   against   intemper- 
ance. 


226  YALE  READINGS  IN   INSURANCE 

10.  The  improvement  in  sanitary  conditions  and  in  the 
means  of  travel  has  justified  the  companies  in  eliminating 
most  of  the  restrictions  upon  residence.    About  one-half 
of  the  companies  have  no  restrictions  whatever.    A  man 
can  take  out  a  policy  in  this  country  to-day,  pay  for  it, 
and  to-morrow  travel  to  and  reside  in  a  country  where 
the  mortality  is  admittedly  twofold.    I  fully  agree,  be- 
cause statistics  show  that  a  restriction  in  the  temperate 
zone  is  unnecessary,  but  I  can  find  no  justification  for 
allowing  persons  to  take  out  policies  in  the  temperate 
zone  at  regular  rates,  and  then  permitting  them  to  live  in 
the  fever-stricken  sections  of  the  tropics  without  requir- 
ing an  extra  premium.    No  argument  against  this  is  neces- 
sary beyond  the  statistics  of  our  American  companies 
which  do  business  in  the  tropics.    While  it  is  true  that 
they  collect  a  larger  premium,  it  is  also  true  that  about 
50  per  cent,  of  such  larger  current  premium  is  required  to 
pay  the  current  losses,  while  in  the  temperate  zone  about 
25  per  cent,  of  a  smaller  premium  is  sufficient.    Hence, 
conservatively  managed  companies  incorporate  some  policy 
restriction  which  will  neutralize  the  effect  of  residence  and 
travel  either  in  portions  of  the  tropics  or  in  portions  of 
the  frigid  zone. 

11.  The  public  sentiment  already  referred  to  as  due  to 
unfortunate  insurance  conditions  following  the  Civil  War 
is  responsible  for  a  division  of  opinion  among  the  life 
companies    with    regard    to    the    so-called    incontestable 
clause.    One  class  —  and  this  class  is  decidedly  in  the 
minority  —  favors  what  is  known  as  the  "open  door" 
policy,  which  in  effect  provides  that  after  the  policy  has 
been  issued  the  company  is  precluded  from  raising  any 
question  as  to  the  validity  of  the  contract.    This  class  of 
companies  must  of  necessity  employ  a  retinue  of  inspec- 
tors and  detectives  to  learn  all  about  the  character  of  the 
risk  before  a  policy  is  issued.    This  involves  a  large  ex- 
pense which  must  be  borne  by  the  existing  policy-holders. 

Another  class  of  companies  believes  that  every  appli- 


POLICY  CONTRACTS  227 

cant  should  personally  become  responsible  for  the  truth 
of  his  own  statements  for  a  limited  time  —  usually  two 
years  —  without  entailing  on  the  other  policy-holders  the 
expense  incident  to  the  special  and  searching  investiga- 
tions necessary  in  case  a  policy  is  incontestable  from  date 
of  issue. 

There  are  not  only  common  law  questions,  but  questions 
of  public  policy  involved.  As  a  common  law  principle 
fraud  vitiates  contracts.  As  a  matter  of  public  policy,  no 
man  should  be  allowed  either  for  himself  or  his  dependents 
to  profit  by  his  own  fraud.  Hence,  96  per  cent,  of  the 
companies  do  not  issue  policies  incontestable  from  date 
of  issuance.  Instead  their  policies  become  incontestable 
usually  two  years  afterward.  This  gives  a  company  the 
opportunity,  in  the  regular  course  of  business,  of  verifying 
the  statements  upon  which  the  contract  is  based,  and  if  it 
finds  that  untrue  and  fraudulent  statements  have  been 
made,  and  the  insured  does  not  voluntarily  surrender  the 
policy  when  called  upon  to  do  so,  equity  proceedings  are 
usually  instituted  to  compel  its  surrender. 

The  courts  of  several  states  have  held  such  policies, 
after  the  lapse  of  the  contestable  period,  to  be  absolutely 
incontestable,  because  the  company  issuing  such  a  policy 
has  reserved  to  itself  a  period  of  time  to  investigate  and 
discover  any  false  or  fraudulent  statement  that  would 
vitiate  the  policy.  If  it  fails  to  investigate  and  discover, 
the  fault  is  its  own  and,  therefore,  it  cannot  avail  itself  of 
the  common  law  principle  which  obtains  in  case  the  policy 
is  made  incontestable  from  date  of  issuance,  viz.,  that 
fraud  vitiates  or  renders  null  and  void  all  contracts.  It 
may  therefore  be  contended,  with  considerable  force,  that 
the  few  companies  which  have  no  incontestable  clauses  are 
better  protected  against  fraud  than  those  which  do  have 
such  clauses.  On  the  other  hand,  if  the  fraud  is  of  such 
a  character  as  not  to  be  detected  within  two  years  it  can- 
not be  serious  and,  by  the  express  terms  of  the  contract, 
should  not  be  allowed  to  affect  it. 


228  YALE  READINGS  IN  INSURANCE 

12  and  13.  The  feature  of  grace  in  the  payment  of 
premiums  had  its  origin  in  the  desire  of  the  companies  to 
do  all  they  could  within  the  limits  of  safety  to  avoid  lapses. 
Its  principal  effect  is  to  postpone  the  last  day  of  payment, 
or  the  final  due  date.  Therefore,  if  a  policy-holder,  instead 
of  using  the  days  of  grace  as  a  margin  to  avoid  lapse, 
should  get  into  his  mind  that  instead  of  the  final  day  of 
payment  being  March  1  it  is  March  30,  and  should  pro- 
crastinate accordingly  every  year,  he  would  lose  all  the 
benefits  of  the  feature. 

Reinstatement  should  not  be  simply  a  matter  of  grace, 
but  a  matter  of  right  under  the  contract,  upon  compliance 
with  reasonable  requirements  to  prevent  those  who  pur- 
posely lapse  their  policies  from  coming  back  into  the 
company  after  they  have  become  afflicted  with  disease. 

14,  15,  and  16.  The  non-forfeiture  and  dividend  pro- 
visions, as  also  those  covering  payment  of  claims,  are 
features  upon  which  there  is  such  a  degree  of  unanimity 
and  such  uniformity  of  practice  that  there  is  little  to  be 
said  beyond  what  will  be  disclosed  by  the  examination  of 
the  policies  of  any  reserve  company. 

In  a  general  way,  however,  I  will  say  that  cash  surrender 
values  are  not  only  liable  to  defeat  the  very  purpose  of 
protection  for  which  insurance  stands,  but  to  encourage 
selection  against  the  company;  and  that  the  non-forfeit- 
able  values,  through  competition,  have  become  liberal  to 
a  fault.  A  company  that  imposes  penalty  for  discontinu- 
ance will  best  serve  its  persisting  policy-holders. 

The  dividend  clauses,  whether  annual  or  deferred,  should 
be  explicit,  direct,  unequivocal,  and  enforcible.  A  con- 
tract that  does  not  clearly  and  distinctly  draw  the  line 
between  surplus  and  distributive  surplus,  and  that  with- 
out some  governing,  fundamental  principle  leaves  the 
rules  and  directors  of  the  company  in  the  future  to  deter- 
mine what  surplus  is  or  is  not  distributive,  is  objection- 
able. 

The  ideal  policy  stipulates  the  governing  principle  which 


POLICY  CONTRACTS  229 

in  the  matter  of  distributing  profits  is  binding  both  upon 
the  insurer  and  the  insured. 

The  conditions *  mentioned  in  the  preceding  sections 
under  the  laws  as  they  existed  in  1905  are  referred  to  as 
not  having  been  handicapped  by  legal  restrictions,  and 
although  the  liberty  resulted  in  abuse,  the  public  derived 
benefit  from  the  great  variety  of  contracts  which  could 
have  been  possible  only  in  the  absence  of  statutory  policy 
provisions.  What  has  been  said  in  the  preceding  sections, 
therefore,  has  application  to  over  five  million  life  insurance 
contracts  in  existence.  Conditions,  however,  have  changed. 
In  the  year  1906,  the  legislature  of  the  State  of  New  York, 
following  a  legislative  investigation  into  the  methods  of 
a  few  life  insurance  companies  of  that  State,  enacted  vari- 
ous laws  intended  for  the  better  regulation  of  the  business 
of  life  insurance.  Among  such  laws  was  one  providing 
standard  forms  of  policies  to  be  used  by  the  companies  of 
that  State.  This  has  already  been  repealed.  In  its  place, 
however,  the  legislature  adopted  statutory  policy  provi- 
sions substantially  on  the  line  of  those  adopted  in  fifteen 
other  states  of  the  Union. 

Under  the  head  of  "Classification  of  Risks"  will  be 
found  the  classification  then  in  use  by  fifty-one  companies. 
The  management  of  these  companies  classified  according 
to  the  experience  of  the  companies  and  the  preconceived 
ideas  of  the  managers.  Such  classification  as  to  new  busi- 
ness has  been  largely  eliminated,  and  the  following  statu- 
tory provisions  substituted,  which  must  be  inserted  in  the 
policies : 

1  The  preceding  paper  on  policy  contracts  was  written  by  Mr.  Fouse 
in  1905.  The  upheaval  in  the  insurance  world  which  was  even  then 
taking  place  produced  so  many  changes  in  policy  contracts  that  Mr. 
Fouse  consented  to  add  the  following  pages  to  his  former  paper.  What 
appears  in  his  former  article  applies  to  so  many  existing  contracts, 
however,  that  students  of  insurance  cannot  afford  to  overlook  it. 
(Editor.) 


230  YALE  READINGS  IN  INSURANCE 

1.  A  provision  that  premiums  shall  be  payable  in  ad- 
vance at  the  home  office  of  the  company,  or  to  an  agent 
upon  delivery  of  a  receipt  signed  by  one  or  more  officers 
named  in  the  policy  and  countersigned  by  such  agent. 

2.  A  provision  for  a  grace  of  one  month  in  the  payment 
of  every  premium  after  the  first. 

3.  A  provision  that  the  policy  shall  be  incontestable 
after  two  years,  except  for  non-payment  of  premiums  and 
except  for  violation  of  the  conditions  of  the  policy  relating 
to  naval  and  military  service  in  time  of  war. 

4.  A  provision  that  the  policy  shall  contain  the  entire 
contract  and  that  all  statements  made  by  the  insured  shall 
be  deemed  representations  and  not  warranties,  and  no 
such  statement  shall  avoid  the  policy  unless  contained  in 
a  written  application,  a  copy  of  which  shall  be  attached  to 
the  policy  when  issued. 

5.  A  provision  that  if  the  age  of  the  insured  has  been 
misstated,  the  amount  payable  under  the  policy  shall  be 
such  as  the  premiums  paid  would  have  purchased  at  the 
correct  age. 

6.  A  provision  for  ascertainment  and  distribution  of 
surplus  annually  after  the  first  policy  year  (in  some  states 
after  third  or  fifth  policy  year),  and  that  the  owner  of  the 
policy  shall  have  the  right  each  year  to  elect  to  receive 
the  current  dividend  upon  the  policy  in  cash;   or  to  have 
it  applied  to  the  payment  of  premiums,  or  to  the  purchase 
of  paid-up  additions  to  the  policy;  or  to  be  left  to  accumu- 
late at  a  rate  of  interest  to  be  specified,  but  withdrawable 
at  any  anniversary  of  the  policy. 

7.  A  provision  that  the  owner  of  the  policy  may  at  any 
time  after  three  years  borrow  on  the  sole  security  of  the 
policy  a  sum  equal  to  the  reserve  upon  the  policy  at  the 
end  of  the  current  policy  year  and  any  dividend  additions 
thereto,  less  any  indebtedness  on  the  policy  and  interest 
in  advance  to  the  end  of  the  current  policy  year,  and  that 
failure  to  repay  such  loan  or  to  pay  interest  thereon  shall 
not  avoid  the  policy  unless  the  total  indebtedness  thereon 


POLICY  CONTRACTS  231 

shall  equal  or  exceed  the  loan  value  at  the  time  of  such 
failure. 

8.  A  provision  whereby,  in  the  event  of  default  in  pre- 
mium payments  after  three  years,  the  owner  of  the  policy 
shall  be  entitled  to  extended  or  paid-up  insurance,  the  net 
value  of  which  shall  be  at  least  equal  to  the  entire  reserve 
upon  the  policy  and  any  dividend  additions  thereto  at 
date  of  default,  less  a  sum  not  exceeding  2J  per  cent,  of 
the  amount  insured  by  the  policy  and  any  dividend  ad- 
ditions thereto,  and  less  any  existing  indebtedness  to  the 
company  on  the  policy;  also  that  the  policy  in  such  event 
may  be  surrendered  for  a  specified  cash  value  at  least  equal 
to  the  value  of  such  extended  or  paid-up  insurance. 

9.  A  table  showing  in  figures  the  loan  value  and  options 
upon  default  in  premium  payments. 

10.  A  provision  for  reinstatement  of  the  policy  within 
three  years  after  default  in  premium  payments  upon  fur- 
nishing evidence  of  insurability  satisfactory  to  the  com- 
pany and  payment  of  arrears  of  premiums. 

11.  A  provision  that  when  the  policy  shall  become  a 
claim  by  the  death  of  the  insured,  settlement  shall  be  made 
not  later  than  two  months  after  receipt  of  due  proof  of 
death. 

12.  A  table  showing  the  number  and  amount  of  instal- 
ments in  which  the  proceeds  of  the  policy  may  be  pay- 
able. 

13.  A  title  on  the  face  and  on  the  back  of  the  policy 
correctly  describing  the  policy. 

In  addition  to  the  statutory  provisions  as  to  what 
clauses  the  policy  shall  contain  there  have  also  been  enacted 
laws  prohibiting  any  of  the  following  provisions: 

1.  A  provision  for  forfeiture  of  the  policy  for  failure 
to  repay  any  loan  thereon  or  interest  on  such  loan  while 
the  total  indebtedness  on  the  policy  is  less  than  the  loan 
value  thereof. 

2.  A   provision   limiting   the  time  within  which  any 
action  at  law  or  in  equity  may  be  commenced  to  less  than 


232  YALE  READINGS  IN  INSURANCE 

a  specified  period,  varying  from  one  to  five  years  in  differ- 
ent states. 

3.  A  provision  whereby  the  policy  would  provide  for  a 
premium  rate  at  any  age  younger  than  age  at  date  of  appli- 
cation. 

4.  Any  provision  for  any  mode  of  settlement  at  maturity 
of  less  value  than  the  amount  insured,  stated  on  the  face 
of  the  policy,  plus  dividend  additions,  if  any,  less  any 
indebtedness  to  the  company. 

The  objections  to  statutory  provisions  are: 

(a)  They  prevent  development  and  improvement  in 
life  insurance  in  accord  with  the  experience  and  progress 
of  the  age. 

(6)  The  officials  of  every  sovereign  state,  in  obedience 
to  the  law  of  such  state,  are  not  always  amenable  to  comity 
and,  therefore,  exact  requirements  that  impose  upon  the 
companies  and  consequently  upon  the  policy-holders  ex- 
cessive burdens  that  do  not  benefit  the  business  and  are 
in  fact  detrimental  to  it. 

(c)  In  the  absence  of  national  supervision  of  insurance, 
standard  policies  and  standard  provisions  are  not  practical, 
and  sooner  or  later  will  be  repealed,  or  national  super- 
vision will  be  adopted.  Even  though  a  reasonable  degree 
of  uniformity  may  be  secured  at  one  sitting  of  the  legis- 
lature, at  the  next  sitting  it  may  be  undone,  and  chaos 
and  lack  of  harmony  with  other  states  created. 

The  advantages  to  be  gained  by  the  statutory  policy 
provisions  are : 

(a)  A  greater  degree  of  uniformity  in  contracts  and 
less  difficulty  and  expense  on  the  part  of  the  insured  in 
interpreting  contracts.  This  is  evidenced  by  an  examina- 
tion of  the  classification  of  the  restrictions  of  fifty-one 
companies  as  represented  above,  as  compared  with  the 
restrictions  and  provisions  set  forth  in  this  section. 

(6)  A  careful  examination  will  show  that  the  provisions 
and  policy  conditions  which  obtained  in  the  contracts  of 
a  majority  of  the  fifty-one  companies  referred  to  above 


POLICY  CONTRACTS  233 

have  been  incorporated  in  the  statutory  provisions, 
and  they  are,  therefore,  in  keeping  with  the  best  practice 
among  the  better  class  of  companies.  To  this  extent  the 
enactment  of  the  statutory  provisions  has  been  beneficial, 
and,  upon  the  whole,  will  serve,  educationally,  a  good 
purpose,  even  though  such  provisions  should  not,  in  the 
absence  of  national  supervision,  become  a  permanent 
feature  of  life  insurance. 


CHAPTER  XVI 

POLICY   CONDITIONS  * 

IT  is  one  of  the  characteristics  of  the  American  that 
when  he  takes  up  a  fresh  line  of  research  or  a  new  pursuit 
he  is  prone  to  concentrate  his  energies  upon  the  particular 
subject  which  happens  to  engage  his  attention  until  he 
has  exhausted  its  every  useful  possibility  or  developed  it 
to  such  an  extent  that  it  seems  incapable  of  further  im- 
provement. It  is  to  this  national  characteristic  that  we 
owe  much  of  our  success  as  a  people  in  practical  pursuits, 
invention,  commerce,  and  war.  For  the  past  ten  years  the 
architects  of  life  insurance  have  been  exhibiting  this 
national  characteristic  in  the  development  of  special  fea- 
tures in  policy  contracts.  To  such  an  extent  has  this  tend- 
ency been  carried  that  the  good  old-fashioned  forms  of 
life  and  endowment  policies  appear  to  be  struggling  for 
an  existence  amidst  a  mass  of  consols,  debentures,  bonds, 
and  income  policies. 

These  new  forms  of  policies  are  generally  produced  by 
combining  with  the  simpler  forms  of  life  and  endowment 
policies  a  deferred  annuity  element  guaranteeing  to  the 
insured  after  a  specified  period  of  years,  or  to  a  beneficiary 
on  the  death  of  the  insured,  an  attractive  income  — 
usually,  but  improperly,  called  interest  —  upon  the  prin- 
cipal sum  of  the  policy.  In  some  instances  an  attempt  is 
made  to  enhance  the  value  of  the  policy  by  paying  the  in- 
come through  a  trust  company  or  by  attaching  negotiable 

1  By  John  B.  Lunger,  Vice-President  of  the  Travelers  Insurance 
Company,  Hartford.  Reprinted  from  pages  178-211  of  "Insurance, 
a  Text-Book." 

234 


POLICY  CONDITIONS  235 

coupons  to  the  policy.  While  the  spirit  of  life  insurance 
is  keenly  in  sympathy  with  features  intended  to  provide 
for  old  age  or  to  guard  the  final  effectiveness  of  the  pro- 
ceeds of  a  policy,  care  should  be  exercised  in  drafting 
contracts  intended  to  subserve  such  excellent  purposes  to 
include  only  such  benefits  as  are  within  the  legitimate  scope 
of  the  business.  If  an  income  (interest)  is  to  be  paid  after 
the  maturity  of  the  policy,  the  rate  assumed  should  be 
kept  within  the  rate  which  the  company  makes  use  of  in 
computing  its  policy  liabilities,  and  the  payments  should 
be  made  direct  to  the  insured  or  to  the  beneficiary.  If 
the  rate  is  made  to  appear  larger  than  can  be  earned  on 
a  safe  investment,  or  the  deferred  annuity  element  is 
merely  a  subterfuge  to  secure  an  extra  loading  on  the 
premium,  the  policy  is  liable  to  become  an  instrument  of 
deception. 

The  expediency  of  issuing  policies  with  negotiable  in- 
terest coupons  is  seriously  open  to  question.  It  should 
always  be  borne  in  mind  that  the  function  of  life  insurance 
is  to  protect  the  family  and  to  provide  for  adversity  or 
old  age;  not  to  furnish  securities  to  be  bought  and  sold 
in  the  open  market  or  passed  from  hand  to  hand,  like  rail- 
road stocks  or  bonds.  It  is  to  be  hoped  that  this  par- 
ticular feature  will  soon  be  numbered  among  the  things 
of  the  past. 

We  might  properly  take  exception  to  certain  other  of 
these  basal  features,  but  in  the  main  the  tendency  has  been 
in  the  right  direction,  and  out  of  the  many  innovations, 
advantages  will  accrue  which  will  prove  of  lasting  benefit 
to  the  business. 

There  are  no  statistics  upon  which  to  base  an  estimate 
of  the  losses  incurred  through  unwise  investment  of  the 
sums  paid  to  beneficiaries  as  death  claims,  but  when  one 
observes  how  very  few  have  solved  the  problem  of  invest- 
ing even  small  sums  beyond  risk  of  loss,  it  is  not  surprising 
that  the  officers  of  life  insurance  companies  should  feel 
great  concern  regarding  the  preservation  of  the  sums  paid 


236  YALE  READINGS  IN  INSURANCE 

to  beneficiaries,  especially  when  it  is  considered  that  such 
payments  often  constitute  the  only  provision  which  the 
insured  has  been  able  to  make  for  those  dependent  upon 
him.  We  should  welcome,  therefore,  any  feature  which 
will  protect  the  insurance  after  the  death  of  the  policy- 
holder  and  serve  to  safeguard  the  purposes  for  which  the 
insurance  was  taken.  The  plan  of  paying  policy  moneys 
in  instalments  is  so  in  keeping  with  this  thought  that  it 
is  worthy  of  special  mention  and  commendation.  There 
are  two  ways  in  which  instalment  policies  are  made  pay- 
able. The  first  form  limits  the  payments  to  a  specified 
period  of  years,  generally  ten,  fifteen  or  twenty,  and  the 
second  form,  which  is  by  far  the  more  preferable,  provides 
for  at  least  twenty  annual  payments,  and  if  the  beneficiary 
is  living  at  the  end  of  this  period,  the  payments  are  con- 
tinued during  the  remainder  of  life.  This  latter  method 
of  payment  is  embodied  in  what  is  known  as  the  continu- 
ous instalment  policy,  and  when  that  policy  is  so  drawn 
that  the  instalments  cannot  be  assigned  or  commuted  dur- 
ing the  life  of  the  beneficiary,  it  constitutes  to  my  mind 
the  ideal  form  of  protective  life  insurance. 

One  of  the  prominent  companies  safeguards  its  insurance 
in  another  way.  It  will,  at  the  request  of  the  insured, 
attach  to  its  policy  a  certificate,  in  which  the  insured  may 
define  his  wishes  as  to  the  disposition  of  his  policy.  Gen- 
erally a  beneficiary  is  named  to  whom  a  stated  income  is 
paid  as  long  as  the  proceeds  of  the  policy  will  permit. 
Interest  is  allowed  upon  the  fund  remaining  in  the  hands 
of  the  company,  at  a  rate  of  about  J  of  1  per  cent,  less  than 
the  rate  the  company  earns  upon  its  investments.  The 
proceeds  of  a  policy  to  which  this  certificate  is  attached 
become  a  trust  fund  which  is  administered  strictly  in  accord- 
ance with  the  wishes  of  the  person  by  whom  the  trust  was 
established.  The  payments  made  are  free  from  taxation 
and  all  other  charges. 

I  would  venture  to  predict,  as  one  of  the  outcomes  of 
the  present  tendency  amongst  men  of  wealth  to  place  their 


POLICY  CONDITIONS  237 

estates  in  trust,  that  a  considerable  number  of  the  policies 
written  in  the  future  for  large  amounts  will  include  either 
the  instalment  or  the  trust  features  which  have  just  been 
described. 

Among  the  special  features  wisely  developed  in  recent 
years  under  the  non-forfeiting  tontine  or  accumulation 
policy  is  the  privilege  given  the  insured  of  making  a  choice 
among  various  methods  of  settlement  at  the  end  of  the  first 
dividend  period.  This  feature  has  added  greatly  to  the 
popularity  of  the  form  of  insurance  mentioned.  The 
insured  is  no  longer  confined  to  one  of  two  alternatives: 
(a)  remain  in  the  company  and  take  insurance,  (6)  get 
out  and  take  cash  (often  with  a  large  discount);  nor  is  he 
obliged  to  decide  at  the  inception  of  his  insurance  what 
disposition  he  will  make  of  his  policy  at  the  end  of  the  first 
dividend  period.  At  least  three  options  are  always  given, 
namely,  the  privilege  of  withdrawing  in  cash  the  entire 
proceeds  of  the  policy,  consisting  of  the  reserve  and  the 
accumulated  dividend;  or  of  applying  the  proceeds  to  pur- 
chase paid-up  insurance  at  net  rates;  or  to  purchase  an 
annuity.  When  the  form  of  insurance  permits,  these 
three  options  are  supplemented  by  others,  which  consist 
of  combinations  of  cash  and  insurance,  insurance  and  an 
annuity,  annuity  and  cash,  and  so  on;  the  options  as  a 
whole  being  so  comprehensive  that  at  the  end  of  the  divi- 
dend period  the  insured  may  adjust  his  policy  to  suit  his 
then  condition  of  life. 

The  practice  of  writing  surrender  values  in  dollars  and 
cents  in  the  policy,  instead  of  merely  giving  the  rule  by 
which  such  values  will  be  calculated,  is  helping  to  dissi- 
pate the  idea  that  life  insurance  contracts  are  full  of  tech- 
nicalities and  pitfalls.  It  is  to  be  regretted  that  some  of 
our  leading  companies  hesitate  to  adopt  this  practice,  and 
for  no  other  reason,  apparently,  than  that  it  increases  the 
liability  to  error  in  writing  the  policy,  and  puts  them  to  a 
slight  extra  expense.  Errors  can  be  avoided  by  the  proper 
checks,  and  the  expense  will  be  met  many  times  over  by 


238  YALE  READINGS  IN  INSURANCE 

the  diminution  in  lapses,  which  is  the  invariable  result  of 
a  clear  and  liberal  policy.  So  far  as  I  am  informed,  the 
first  serious  mistake  in  writing  these  tables  has  yet  to  occur. 
It  is  to  be  hoped  that  this  feature  will  extend  until  all  life 
insurance  policies  are  so  explicit  that  inability  to  read 
will  be  the  only  excuse  that  can  be  given  for  a  failure  to 
comprehend  them  in  all  their  details. 

The  embodiment  of  cash  loan  privileges  in  policy  con- 
tracts may  be  regarded  as  one  of  the  most  important  new 
features  in  life  insurance.  The  right  of  the  insured  to  an 
equity  in  the  reserve  on  his  policy  finds,  in  my  judgment, 
its  best  recognition  in  the  granting  of  loans  at  stated  times 
upon  reasonable  terms  and  conditions.  How  often  is  it 
noticed  that  when  the  holder  of  a  policy  finds  himself  in 
trouble  he  hastens  to  apply  for  the  cash  value  of  his  policy, 
although  it  is  evident  that  at  such  a  time  life  insurance  is 
an  urgent  necessity  and  should  not  be  abandoned  without 
careful  consideration.  How  much  better  for  all  concerned 
if  the  desired  relief  can  be  gained  without  the  entire  sacri- 
fice of  that  which,  in  the  event  of  death  of  the  insured, 
may  stand  between  those  depending  upon  him  and  penury. 
The  officers  of  companies  granting  cash  loans  will  undoubt- 
edly certify  that  in  the  panicky  times  of  1893-94  the  relief 
given  through  loans  on  policies  saved  many  thousands  of 
policy-holders  from  serious  financial  trouble,  while  enabling 
them  to  continue  the  much  needed  insurance,  and  those 
benefited  on  their  part  will,  no  doubt,  gladly  testify  to 
their  appreciation  of  a  plan  which  confers  such  important 
and  timely  advantages.  In  granting  cash  loans  it  is  the 
practice  in  some  companies  to  allow  the  loan  upon  applica- 
tion, without  regard  to  the  continuance  of  the  payment 
of  the  premium  oh  the  policy.  This  practice  is  open  to 
some  of  the  objections  that  may  be  urged  against  cash 
surrender  values.  It  is  better  to  require  that  the  premium 
for  the  ensuing  insurance  year  shall  be  paid  in  advance, 
basing  the  loan  upon  the  reserve  in  that  year.  By  this 
plan  the  insured  always  secures  a  year,  at  least,  in  which 


POLICY  CONDITIONS  239 

to  free  himself  from  his  financial  difficulties  and  to  make 
provision  for  the  payment  of  the  ensuing  premium  on  his 
policy. 

The  premium  lien  note  is  but  a  modified  form  of  the  cash 
loan,  and  its  use  is  to  be  encouraged  when  the  financial 
difficulties  of  the  insured  affect  only  his  power  of  paying 
his  current  premium.  These  notes  are  commonly  drawn 
as  a  permanent  lien  on  the  policy,  payable  at  the  conven- 
ience of  the  insured.  This  convenient  time,  as  is  the  case 
with  most  matters  relating  to  life  insurance  when  left  to 
the  discretion  of  the  insured,  is  apt  seldom  to  arrive,  and 
the  notes,  therefore,  generally  become  a  permanent  in- 
cumbrance  on  the  policy.  It  has  often  occurred  to  me 
that  if  these  notes  could  be  drawn  after  the  style  of  an 
ordinary  note  of  hand,  and  made  payable  at  the  end  of  a 
stated  period  at  a  national  bank,  that  a  large  percentage 
of  them  would  be  paid  in  cash.  In  event  of  non-payment 
they  could  be  renewed  for  a  further  period,  provided  the 
policy  was  continued  in  force. 

Among  the  new  features  introduced  during  the  five 
years  succeeding  the  Civil  War  was  the  first  use  of  the 
return-premium  idea  in  this  country.  Later  it  came  into 
much  wider  use,  and  at  the  present  time  a  considerable  frac- 
tion of  the  life  insurance  contracts  issued  are  in  effect 
increasing  insurances  during  the  first  twenty  years  of 
their  existence,  the  annual  increase  being  equal  to  the 
premium  or  to  some  proportion  thereof.  This  appendix 
to  the  original  contract  has,  in  many  cases,  been  the  source 
of  intense  gratification  to  the  heirs  of  the  insured.  It  was 
Carlyle  who  pointed  out  that  the  mental  satisfaction  de- 
rived from  any  newly  received  possession  depends  on  the 
ratio  of  what  we  receive  to  what  we  expected  to  receive. 
How  often  has  it  happened,  in  the  settlement  of  death 
claims  of  policies  which  carried  no  return-premium  attach- 
ment, that  the  deduction  of  unpaid  fractional  premiums 
from  the  understood  amount,  or  in  more  serious  measure 
of  loans  which  the  insured  had  obtained  against  the  policy, 


240  YALE  READINGS  IN  INSURANCE 

has  left  the  net  result  in  the  minds  of  the  beneficiaries 
one  of  discontent,  and  how  much  more  agreeable  to  all 
concerned  are  such  settlements  when  that  little  return- 
premium  attachment  has  provided  the  extra  amount 
which  covers  all  the  company's  claims  against  the  insurance, 
and  still  leaves  to  the  heirs  some  excess  over  the  nominal 
face  of  the  policy. 

Our  business  has  sometimes  been  referred  to  as  one  of 
risks,  chiefly  of  death.  Those  who  are  familiar  with  the 
statistics  know  that  so  long  as  medical  directors  are 
restricted  in  their  selection  of  lives  by  present  rules  and 
traditions,  the  "risk  of  death"  may  be  forecast  to  an  al- 
most absolute  certainty,  and  that  the  resulting  deaths  will 
be  well  within  the  tabular  limits.  The  stringent  selection 
of  risks  is  chiefly  due,  in  my  opinion,  to  the  pressure  put 
upon  the  companies  to  pay  large  dividends.  When  this 
pressure  is  reduced,  and  the  payment  of  dividends  becomes, 
as  it  should  be,  a  subsidiary  feature  of  life  insurance,  the 
ratio  of  mortality  will  be  somewhat  nearer  the  tabular 
expectation,  and  there  will  have  been  a  great  addition  to 
the  usefulness  of  the  business.  In  the  meantime,  many 
worthy  applicants  and  their  families  must  suffer  because 
existing  conditions  demand  low  mortality  ratios. 

Until  mortality  becomes  a  more  elastic  factor,  any  plan 
which  will  give  insurance  to  an  under-average  risk  ought 
to  be  as  welcome  to  the  business  as  a  breath  of  cool  air 
to  a  fevered  patient.  Policies  on  under-average  lives  have 
been  issued  in  England  for  many  years,  but  the  business 
has  never  assumed  large  proportions.  Several  small  com- 
panies have  been  formed  in  this  country  for  the  purpose 
of  making  a  specialty  of  this  class  of  business,  but  those 
which  have  not  failed  have  either  drifted  into  regular  chan- 
nels or  are  still  in  the  experimental  stage.  It  is  only  re- 
cently that  one  of  the  prominent  American  companies  has 
entered  this  very  promising  field.  That  company  several 
years  ago  formed  a  special  department  for  the  collection 
of  data  pertaining  to  its  declined  risks.  The  information 


POLICY  CONDITIONS  241 

obtained  was  classified  and  special  mortality  tables  were 
then  computed  upon  which  that  company  is  now  issuing 
policies  subject  to  liens  or  extra  premium,  or  both,  to  a 
large  percentage  of  applicants  who,  under  former  conditions, 
would  have  been  declined.  Of  all  the  new  features  in  our 
business,  this  one  is  capable  of  the  largest  development 
and  offers  the  best  field  for  investigation  and  study.  Life 
insurance  should  be  a  broad  business  of  underwriting  any 
reasonable  contingency  of  life  or  death. 

The  practice  of  paying  claims  promptly,  and  of  guaran- 
teeing this  in  the  policy,  has  blown  away  one  of  the  clouds 
that  formerly  cast  its  shadow  over  life  insurance,  and  may 
be  fittingly  referred  to  as  a  special  feature.  It  is  neither 
delicate  nor  prudent  to  force  money  on  a  beneficiary  at  a 
time  when  her  mind  is  distracted  by  grief,  but  as  soon  as 
proofs  of  death  are  made  out,  both  good  taste  and  judg- 
ment dictate  that  payment  of  the  claim  should  not  be 
delayed.  "Pay  all  debts  promptly,"  is  as  good  a  maxim 
to  follow  in  life  insurance  as  in  our  private  affairs. 

There  are  a  number  of  new  features  of  minor  importance 
in  ordinary  insurance  that  I  might  refer  to  if  so  disposed, 
but  none  of  them  seem  to  call  for  special  comment  beyond 
that  they,  together  with  the  more  important  special  fea- 
tures, the  elimination  of  technical  and  objectionable  con- 
ditions and  the  increase  in  surrender  values,  have  aided 
to  produce  the  policy  of  to-day,  with  its  freedom  from 
restrictions,  its  brevity,  its  clearness  of  statement,  and  its 
remarkable  adaptability  to  every  reasonable  contingency. 

The  fact  that  most  life  insurance  companies  are  con- 
ducted on  the  mutual  plan  under  which  all  profits  revert 
to  the  insured,  and  the  desire  of  the  insured  to  secure  the 
largest  possible  returns  for  the  premiums  paid,  combine  to 
make  dividends  and  the  methods  of  their  distribution  a 
subject  of  great  importance;  but  it  does  not  necessarily 
follow  that  so  much  stress  should  be  laid  on  these  features 
of  the  business  as  to  lead  one  not  familiar  with  life  insur- 


242  YALE  READINGS  IN  INSURANCE 

ance  to  think  that  payment  of  dividends  is  the  chief  object 
of  the  business.  More  circulars  were  woven  around,  and 
more  arguments  based  upon,  the  $18,000,000  of  dividends 
that  the  companies  paid  out  last  year  than  upon  the 
$80,000,000  that  were  distributed  in  death  claims  and 
endowments.  Agents,  in  soliciting,  fall  into  the  same  error, 
and  discourse  more  eloquently  upon  the  dividend  which 
a  particular  policy  will  pay  than  upon  all  its  other  bene- 
fits combined;  and  when  two  agents  meet  in  competition, 
one  representing  a  semi-tontine  company  and  the  other 
an  annual  dividend  company,  many  of  the  intrinsic  merits 
of  life  insurance  are  lost  sight  of  in  the  smoke  that  arises 
from  the  fiery  arguments  for  and  against  these  two  methods 
of  paying  dividends. 

The  inclination  to  mold  the  policy  contract  to  the  vary- 
ing conditions  of  life  has  not  been  confined  to  the  benefits 
secured  by  persistency,  but  is  observable  also  in  the  develop- 
ment of  plans  whereby  the  rights  of  the  policy-holder  in 
case  of  the  surrender  of  his  policy  are  recognized.  Sur- 
render values  were  first  allowed  in  the  form  of  paid-up 
insurance.  Subsequently  cash  surrender  values  were 
introduced,  and  more  recently  extended  insurance  has 
become  a  feature  in  policy  contracts  of  several  companies. 
At  the  present  time  the  policies  of  a  large  number  of  the 
companies  provide,  in  case  of  surrender,  for  a  choice  between 
paid-up  insurance  and  extended  insurance,  or  between 
cash  and  paid-up  insurance,  while  the  policies  of  several 
companies  offer  either  cash,  paid-up  insurance,  or  extended 
insurance.  Only  two  or  three  companies  offer  paid-up 
insurance  alone,  and  it  is  but  a  question  of  time  when  these 
companies  will  yield  to  the  pressure  of  the  general  prac- 
tice. Each  of  the  allowances  made  in  case  of  surrender  is 
computed  on  such  a  liberal  basis  that  it  would  seem  that 
the  vexatious  question  of  the  proper  charge  or  fine  in  case 
of  surrender  is  being  settled  by  requiring  none  at  all.  It 
is  gratifying  to  find  that  this  liberality  has  not  encouraged 


POLICY  CONDITIONS  243 

surrenders,  but  has  been  rewarded  by  an  increase  in  the 
tenure  of  life  of  the  policy.  In  fact,  we  are  led  to  the  pleas- 
ant conclusion  that  the  owner  of  a  policy  containing  liberal 
and  valuable  benefits  is  as  slow  to  part  with  it  as  he  would 
be  to  sell  any  other  valuable  and  profitable  security. 

As  surrender  values  will  be  discussed  analytically  and 
at  length  in  other  papers  to  be  presented  to  this  Conven- 
tion, I  shall  limit  this  section  of  my  paper  to  a  few  brief 
remarks  on  the  advantages  or  disadvantages  of  the  three 
non-forfeiture  benefits  mentioned. 

The  especial  applicability  of  either  of  these  benefits 
can  only  be  determined  by  a  knowledge  of  the  condition 
of  the  policy-holder  at  the  time  of  surrender,  taken  with 
the  standing  of  the  policy.  In  the  case  of  a  policy  which 
has  acquired  considerable  value,  it  is  advisable  in  the 
majority  of  cases  for  the  policy-holder  to  take  paid-up 
insurance,  especially  if  he  is  well  along  in  years  and  his 
income  is  uncertain  or  is  growing  less  as  time  goes  by. 
Paid-up  insurance  does  not  entail  any  obligation  or  impose 
any  burden,  nor  is  it  brought  to  a  close  except  by  death 
or  surrender.  It  is  a  security  which  can  be  filed  away  with 
the  certainty  that  when  it  matures  it  will  realize  every 
dollar  which  it  represents.  Extended  insurance,  on  the 
other  hand,  is  the  more  advantageous  benefit  for  those  to 
take  who  are  unable  to  pay  their  premiums,  but  who  feel 
the  need  of  a  maximum  of  insurance,  and  expect  within 
a  reasonable  time  to  be  able  to  reinstate  their  contracts 
or  to  take  new  insurance.  Extended  insurance  is  generally 
granted  without  application;  in  other  words,  it  is  given 
automatically,  thus  protecting  the  policy  in  case  the  pay- 
ment of  the  premium  is  overlooked  during  sickness  or 
absence  from  home.  Automatic  extensions  have  this  par- 
ticular value  —  that  no  one  is  deprived  of  the  equity  in 
his  policy  through  any  technicality  or  through  indifference 
or  ignorance  as  to  its  value. 

To  my  mind,  in  every  policy  issued,  either  paid-up  or 
extended  insurance  should  be  made  "automatic,"  and  the 


244  YALE  READINGS  IN  INSURANCE 

companies  should  not  rest  content  with  merely  granting 
this  privilege,  but  should,  in  event  of  lapse,  wait  a  reason- 
able time  for  the  insured  to  apply  for  a  surrender  value, 
but  if  he  does  not  appear  within  this  time  he  should  be 
followed  up  and  a  statement  placed  in  his  hands  giving  the 
value  of  the  benefit  to  which  he  is  entitled. 

The  arguments  which  I  have  advanced  in  favor  of  making 
provision  in  the  policy  for  every  emergency  of  life  point 
to  the  advisability  of  granting  liberal  cash  values  after 
the  necessity  of  protection  may  have  passed  away  and  pro- 
vision for  self  may  have  become  the  first  consideration,  or 
after  the  policy  has  been  in  force  for  the  period  for  which 
in  the  first  instance  it  was  advisedly  taken  out.  While 
the  propriety  of  allowing  cash  surrender  values  for  the  pur- 
pose which  I  have  defined  is  apparent,  there  is  little  to 
justify  the  guarantee  of  annual  cash  surrender  values  in  the 
early  years  of  a  policy,  unless  it  is  that  we  must  take  a  very 
cold-blooded  view  of  our  business,  and  say  that  an  equity 
in  the  reserve  on  the  policy  belongs  to  the  insured,  and 
that  he  should  have  the  right  to  do  as  he  pleases  with  this 
equity.  I  would  contend  that  the  insured  having  advisedly 
entered  into  a  compact  with  the  company  to  provide  cer- 
tain benefits  for  his  family  and  for  himself,  such  compact 
imposes  on  the  company  the  obligation  to  protect  the 
insured  from  a  hasty  or  perhaps  a  foolish  step  that  may 
defeat  the  good  object  he  had  in  mind  when  he  entered 
upon  the  contract. 

A  man  is  not  likely  to  apply  for  a  cash  surrender  value 
in  the  early  years  of  a  policy  unless  he  has,  through  igno- 
rance or  prejudice,  become  dissatisfied  with  the  company 
in  which  he  is  insured,  or  unless  he  is  in  such  a  tight  place 
financially  that  he  must  secure  cash  at  all  hazards.  A 
man  who  demands  cash  for  the  reason  first  given  is  en- 
titled only  to  the  same  consideration  that  we  would  give 
to  any  impulsive  or  thoughtless  request.  In  the  case  of 
a  man  whose  affairs  are  so  badly  involved  that  he  is  obliged 
to  resort  to  his  policy  for  financial  help,  it  is  fair  to  assume 


POLICY  CONDITIONS  245 

that,  by  reason  of  his  difficulties,  he  needs  life  insurance 
more  at  that  particular  time  than  at  any  other  period  in 
his  life.  It  seems  more  in  accordance  with  the  spirit  of 
life  insurance  to  give  him  the  desired  assistance  in  the 
form  of  a  loan  and  to  extend  with  it  the  opportunity  of 
continuing  the  life  insurance.  There  are  individual  cases, 
of  course,  the  circumstances  surrounding  which  call  for 
cash  surrender  values.  Such  cases  should  be  taken  up 
on  their  respective  merits,  but  it  does  not  follow,  because 
cash  values  can  with  propriety  be  allowed  in  certain  cases, 
that  the  interests  of  policy-holders  or  of  the  company 
require  that  they  shall  be  given  in  all  cases,  irrespective 
of  conditions. 

In  conclusion,  I  wish  to  express  a  thought  that  comes  to 
me  very  forcibly  as  I  write  these  lines.  It  is  that  the 
remarkable  improvements  and  changes  in  our  business  in 
the  past  few  years  are  influenced  by  motives  more  sincere 
and  subtle  than  would  be  dictated  by  mere  business  policy. 

Can  we  not  discover  in  them  evidence  of  a  growing 
sense  of  conviction  on  the  part  of  those  to  whom  the  ad- 
ministration of  our  companies  is  confided,  that  life  insur- 
ance is  a  trust  imposing  moral  as  well  as  literal  obligations 
which  must  be  observed  to  the  utmost  degree? 

We  may  not  claim  that  life  insurance  has  reached  a 
state  of  perfection,  but  we  may  assert  that  the  tendencies 
of  the  business  are  in  the  right  direction,  and  that  there 
are  forces  at  work  which  will  produce  further  and  bene- 
ficial transformations  as  time  goes  by. 


CHAPTER  XVII 

SURRENDERS   AND   LOAN   PRIVILEGES  * 

WHEN  we  come  to  consider  the  matter  of  surrender 
values  from  the  point  of  view  of  mutuality,  we  meet  a 
situation  involving  opposing  elements.  The  company  has 
agreed  for  a  certain  premium  to  carry  the  policy  for  the 
lifetime  of  the  insured  or  for  a  definite  term  of  years,  and, 
the  premium  being  paid,  it  has  ordinarily  no  option  of 
discontinuance.  Its  calculations  rest,  and  must  rest,  on 
the  theory  of  the  continuance  both  of  its  risks  and  of  its 
premium  income  to  their  normal  term.  But  it  protects 
its  theory  by  no  contract  to  that  effect  from  the  insured. 
He  is  free  to  pay  or  stop  paying,  regardless  of  his  family's 
need  on  the  one  hand,  or  his  ability  on  the  other.  For 
some  reason  he  stops.  What  considerations  of  duty 
should  govern  the  company  in  its  treatment  of  the  case?  To 
whom  now  does  it  owe  duty;  and,  if  to  more  than  one 
person  or  group  of  persons,  upon  what  several  interests 
of  these  is  this  duty  grounded;  by  what  divergence  of 
these  interests  or  by  what  conflict  between  them  is  duty 
toward  one  or  the  other  of  them  controlled  or  modified; 
which  group  is  entitled  to  have  its  interests  first  con- 
sidered? 

There  can  be  no  question  that  the  company's  first  duty 
is  to  those  to  whom  it  remains  under  contract  obligation  - 
its  continuing  policy-holders.    It  is  first  to  consider  how 
they  are  affected  by  a  withdrawal  of  one  of  their  number; 

1  By  Jacob  H.  Greene,  late  President  of  the  Connecticut  Mutual 
Life  Insurance  Company,  Hartford.  Reprinted  from  pages  167-178 
of  "Insurance,  a  Text-Book." 

246 


SURRENDERS  AND  LOAN  PRIVILEGES          247 

how  the  sure  basis  of  its  operations,  the  solvency  of  its 
contracts,  and  the  future  cost  of  their  administration 
stand  affected.  The  elements  of  the  problem  are  definite; 
the  determination  of  their  weight,  the  measurement  of 
their  operative  force,  is  somewhat  a  matter  of  varying 
circumstances. 

The  effect  of  withdrawals  is  in  three  directions:  they 
reduce  numbers,  thus  narrowing  the  basis  for  averages, 
increasing  the  range  of  fluctuation,  intensifying  its  effect, 
and  prejudicing  steadiness  of  operation;  they  presumably 
take  out  not  only  unimpaired  lives,  but  the  best  lives,  at 
least  those  having  the  strongest  unconscious  instinct  of 
an  enduring  vitality;  while  this  may  not  be  and  is  not 
always  the  case  under  ordinary  conditions  inviting  con- 
tinued confidence,  it  would  be  unsafe  to  predicate  any 
treatment  of  them  upon  any  other  assumption  which  there 
is  no  after  opportunity  of  rectifying,  an  assumption  which 
would  be  realized  to  an  appalling  degree  under  conditions 
which  impaired  confidence  in  corporate  integrity;  and, 
thirdly,  surrenders  for  cash  interfere,  and  may  conceiv- 
ably very  seriously  interfere,  with  that  employment  of 
the  funds  of  the  membership  which  is  of  the  essence  of 
financial  stability  and  a  most  important  factor  in  the 
reduction  of  current  cost  to  continuing  members. 

On  the  other  hand,  it  is  to  be  borne  in  mind  that  in 
withdrawing  the  past  member  has  exercised  an  unfor- 
bidden  power,  and  that  during  his  membership  he  has  not 
only  paid  the  current  cost  of  his  risk,  but  has  also  been 
making  annual  contributions  to  the  reserve  for  the  pur- 
pose of  protecting  the  company  against  the  future  of  his 
risk;  a  part  of  his  increasing  share  in  a  future  greater 
mortality  contributed  now  because  he  is  in  theory  expected 
to  remain  to  share  it  without  paying  a  correspondingly 
greater  future  premium.  Against  the  greater  future  risk 
on  his  life  as  age  increases  the  company  has  been  laying 
aside  each  year  a  compensating  sum  out  of  a  level  pre- 
mium. And  now  that  future  risk  is  eliminated  by  his 


248  YALE  READINGS  IN  INSURANCE 

termination  of  what  was,  at  his  option,  and  in  the  com- 
pany's anticipation,  a  lifelong  contract.  The  company  is 
relieved  of  all  liability  for  that  future  risk  against  which 
it  has  been  reserving  a  sum  from  each  premium  paid. 

The  question  now  is :  What  in  all-round  equity  - 
equity  to  him  who  has  relieved  the  company  of  further 
liability,  and  equity  to  his  associates  from  whom  he  has 
withdrawn  the  supporting  vital  and  financial  strength  of 
his  membership  —  shall  be  done  with  this  man?  How 
shall  these  dual  elements  of  a  situation  which  the  company 
has  left  it  in  his  power  to  create  be  held  in  just  and  true 
balance? 

In  general  terms,  the  answer  is  and  must  be:  do  that 
which  at  once  recognizes  fully  his  free  and  legitimate  right 
of  withdrawal  and  the  termination  of  the  liability,  but 
also  that  which  is  thoroughly  conservative  of  every  right 
interest  of  the  membership  from  which  he  has  withdrawn 
his  support,  of  every  interest,  that  is,  which  he,  while  a 
member,  had  in  common  with  the  rest. 

If  the  withdrawal  of  members  at  any  time,  at  discretion, 
did  not  affect  the  vital  basis  and  therefore  the  sureness 
and  steadiness  of  the  company's  operations,  and  did  not 
so  tend  to  introduce  violent  and  dangerous  fluctuations;  and 
did  not  such  withdrawals  also  tend  to  disturb  and,  under 
clearly  probable  conditions,  to  disturb  very  seriously  those 
lines  of  financial  management  which  the  greatest  good  of 
the  whole  membership  necessarily  presupposes;  and  did 
not  the  duty  of  men  to  protect  their  families,  which  is  the 
whole  ground  and  aim  of  our  proffered  service  to  men  and 
the  reason  for  our  existence,  remain  always  the  paramount 
fact  and  our  primary  point  of  view,  and  the  one  which 
should  govern  our  treatment  of  every  detail,  and  which 
gives  to  us  the  same  plea  to  urge  upon  the  old  members 
for  his  continuance  that  we  use  in  soliciting  new  members, 
and  also  lays  upon  us  the  duty  to  do  what  we  justly  and 
fairly  can  to  see  that  those  families  which  have  been  once 
committed  to  our  care  and  sure  protection  are  not  lightly 


SURRENDERS  AND  LOAN  PRIVILEGES          249 

and  easily  exposed  again  to  danger  through  any  practice  of 
ours,  there  would  be  no  problem  in  the  matter.  We  could 
freely  give  the  departing  member  everything  left  from 
his  past  transactions  with  us.  But  every  one  of  these 
propositions  must  be  taken  in  the  negative  and  taken 
seriously.  The  membership  is  the  company,  and  the  with- 
drawal of  members  narrows  the  basis  of  operation,  and 
thus  widens  the  range  and  intensity  of  fluctuation,  and  may 
be  carried  so  far  as  to  be  destructive  of  a  company's  integ- 
rity. The  company's  investments  are  of  funds  held  for 
a  future;  they  must  be  made  with  a  view  to  that  future, 
and  therefore  of  a  character  very  different  from  those 
adapted  to  meet  sudden  and  uncertain  demands  for  which 
instantly  and  certainly  available  resources  must  be  always 
in  readiness.  The  scheme  of  life  insurance  proposes  that 
its  invested  reserves  shall  be  drawn  upon  only  according 
to  the  foreknown  and  measurable  operation  of  the  law 
of  mortality.  The  right  of  members  to  withdraw  at  any 
time,  taking  their  contributions  to  reserve  in  cash,  nega- 
tives the  whole  scheme,  exposes  the  fund  to  be  drawn  upon 
at  will,  the  draft  upon  it  being,  both  in  time  and  amount, 
dependent  upon  elements  of  motive  which  are  unforeseen 
and  incalculable,  and  of  whose  future  operation  nothing 
is  known  except  that  they  exist,  that  they  may  be  brought 
into  great  and  most  critical  intensity  of  operation  at  any 
time  by  a  variety  of  causes,  and  that  they  are  uncon- 
trollable by  the  company  and  have  absolute  free  play 
against  it.  There  is  no  defense  against  them  except  the 
blind  hope  that  they  may  never  operate. 

The  right  of  free  surrenders  for  cash  inverts  the  theory, 
and  the  only  consistent,  logical,  and  safe  practice  in  life 
insurance,  by  making  the  reserve  consist  in  effect  of  a  mere 
group  of  individual  deposits,  subject  to  check  at  least  once 
a  year,  and  this  feature  of  uncertain  and  precarious  con- 
tinuance of  the  insurance  factor  and  of  the  right  of  with- 
drawal of  invested  funds  becomes  at  once  the  dominant 
feature  of  the  company's  affairs  and  is  the  ultimate  con- 


250  YALE  READINGS  IN  INSURANCE 

tingency  to  be  kept  always  in  view  in  every  matter.  The 
company,  in  effect,  is  no  longer  a  life  insurance  company, 
treating  all  its  affairs  on  a  true  life  insurance  basis,  with 
withdrawal  as  a  mere  incident,  subordinate  in  every  re- 
spect to  the  integrity  of  its  insurance  operations,  but  a 
pseudo  bank  of  deposit,  liable  to  have  all  its  funds  with- 
drawn in  any  year,  needing,  therefore,  to  have  its  invest- 
ments immediately  convertible  into  cash  without  loss, 
while  yet  upon  these  funds  are  founded  the  presumably 
lifelong  contracts  for  whose  prosperous  administration  an 
entirely  different  theory  of  investment  is  essential  and  for 
the  management  of  which  a  bank  is  utterly  unfit. 

So  long  as  a  company  is  rapidly  growing  and  the  average 
of  its  lives  is  still  at  a  young  age,  and  it  has  not  reached 
that  maturity  necessary  to  complete  its  exposure  to  all 
the  vicissitudes  of  mortuary  and  business  experience,  and 
its  credit  has  escaped  attack,  the  practical  danger  of  these 
subverting  factors  will  be  at  a  minimum  and  their  operation 
partly  concealed,  and  hope  may  dwell  in  a  fool's  paradise. 
But  the  condition  of  growth  is  not  an  eternal  one,  no 
matter  what  energy,  under  what  stimulus,  be  applied.  To 
every  company  will  come,  ought  to  come,  in  time  the  con- 
dition when  no  pressure  can  make  its  inflow  of  new  busi- 
ness exceed  its  outflow,  and  when  its  true  normal  will  be 
a  stable  equilibrium  in  amount  at  risk,  in  assets,  income, 
and  outgo. 

Consider  a  company  in  such  a  case  —  whether  large  or 
small  does  not  signify  —  meeting  those  general  business 
conditions  which  cause  most  men  to  take  command  of  all 
available  cash  resources,  with  a  membership  which  has 
been  educated  to  regard  their  policies  as  tickets  for  cash 
practically  on  demand,  and  who  have  taken  them  in  such 
a  company  because  they  were  so  available,  who  were 
willing  to  protect  their  families  so  long  as  they  did  not 
want  to  use  the  money  themselves,  but  who,  not  having 
been  educated  to  put  family  protection  above  every  other 
interest  and  duty,  would  take  that  protection  only  where 


SURRENDERS  AND  LOAN  PRIVILEGES          251 

it  would  not  interfere  with  their  free  use  of  the  money 
when  they  wanted  it,  and  what  may  that  company  reason- 
ably, inevitably  expect?  It  will  suffer  a  withdrawal  of  its 
members,  proportioned  to  the  intensity  of  financial  diffi- 
culty and  pressure;  in  severe  times  a  very  great  number, 
greatly  reducing  its  vitality  basis,  certainly  taking  out  its 
best  and  leaving  its  worst  lives,  and  raising  its  mortality, 
and  requiring  the  conversion  of  its  best  investments  into 
cash  at  a  most  unfavorable  moment  for  their  sale,  in  order 
to  enable  it  to  pay  out  large  sums  to  its  outgoing  members, 
thus  destroying  its  own  credit  and  furnishing  strong  reason 
to  every  sound  life  to  get  out. 

The  danger  is  an  absolute,  immeasurable,  and  most 
critical  one.  It  has  not  yet  appeared  in  full  measure  among 
American  companies  because  few,  if  any,  of  those  which 
are  certainly  exposed  to  its  malign  operation  have  yet 
reached  the  static  condition  which  will  leave  no  practical 
defense  against  its  effects.  But  the  conditions  for  a  dis- 
astrous experience  somewhere  in  the  future  are  being  fully 
prepared  in  many  companies.  The  annual  privilege  of 
surrender  for  cash  is  now  presented  as  a  prime  attraction; 
the  bulk  of  the  business  is  already  exposed  to  be  swept 
away  by  its  exercise.  The  permanency  of  corporate  life 
and  uniformity  of  operation  which  are  absolutely  essential 
to  the  undertakings  of  a  life  insurance  company  are  put 
completely  at  the  caprice  of  members  secured  by  an  appeal 
to  selfish  interest,  not  to  unselfish,  paramount  duty.  In 
order  to  get  new  members  the  more  easily,  they  are  given 
unqualified  power  to  wipe  a  company  out  of  existence  in 
any  one  year. 

To  do  justice  to  the  membership  which  remains,  to  pro- 
tect the  corporate  life  and  integrity  against  capricious 
self-destruction  or  corrupt  or  malicious  assault,  to  give 
still  the  family  of  him  who  withdraws  of  real  necessity 
some  remaining  measure  of  that  protection  which  is  our 
function  and  their  greatest  need,  and  greatest  when  it 
cannot  be  longer  paid  for,  and  yet  to  recognize  fully  and 


252  YALE  READINGS  IN  INSURANCE 

equitably  all  that  is  due  to  the  departing  member  whose 
future  claim  has  lapsed,  the  only  true,  completely  effective 
and  safe  method  is  to  give  paid-up  insurance  for  the  sur- 
rendered policy,  for  its  unexpired  term.  This  retains  the 
member,  minimizes  the  vital  loss  and  the  narrowing  effect 
of  withdrawal,  and  prevents  disturbance,  for  the  advantage 
to  one,  of  the  investments  made  for  the  common  and  equal 
benefit.  Any  other  treatment  of  a  withdrawing  member 
ought  to  be  rare  and  exceptional  and  governed  in  its  detail 
by  those  special  and  rare  circumstances  which  may  right- 
fully constitute  the  exception  for  the  individual  as  against 
the  safety,  profit,  and  general  good  of  all  the  rest. 

In  a  word,  cash  surrender  values  are  false  in  principle, 
constantly  destructive  in  tendency,  expensive  as  calling 
for  a  maximum  replacement  of  lost  business,  and  danger- 
ous to  every  operation  by  which  a  company  proceeds  to 
the  fulfilment  of  its  insurance  obligations. 

Concerning  a  proper  surrender  charge  I  wish  to  say 
only  this:  where  paid-up  insurance  is  given  on  a  lapsing 
policy,  the  charge  should  have  regard  to  the  probable 
vitality  loss  on  the  amount  of  risk  surrendered,  and  to  the 
cost  of  replacing  it  by  new  memberships.  These  are  vari- 
able elements,  especially  the  latter.  In  the  case  of  cash 
surrenders  there  is  need  of  an  additional  charge  in  the 
nature  of  a  safety  fund  or  insurance  against  the  destruc- 
tion of  the  company  or  its  reduction  to  perilous  conditions 
by  the  free  employment  of  the  malign  privilege.  How 
much  that  part  of  the  charge  ought  to  be  we  have  no 
means  of  knowing.  We  have  only  the  conditions  fairly 
set  up  for  the  future  experience  which  will  throw  light  on 
the  matter.  Some  have  already  gone  far  enough  to  know 
that  the  danger  is  not  imaginary  and  is  something  more 
than  theoretical. 

Akin  to  the  annual  cash  surrender  value  in  its  destruc- 
tive effect  both  upon  the  company's  stability  and  existence 
and  upon  the  protection  of  the  family  is  the  loan  to  the 
insured  of  the  reserve  upon  his  policy.  Its  sole  virtue  in 


SURRENDERS  AND  LOAN  PRIVILEGES         253 

comparison  is  that  it  does  not  at  once  and  irrevocably 
destroy  all  the  family's  insurance,  and  leaves  open  the 
possibility  of  its  restoration  by  the  payment  of  the  loan. 
But  if  it  staves  off  the  day  of  cash  surrender  it  goes  much 
more  than  half-way  toward  it.  It  gives  the  cash,  leaves 
the  full  premium  to  be  paid  upon  a  reduced  amount  of 
insurance  while  the  loan  runs,  and  adds  to  the  unreduced 
cost  of  a  reduced  insurance  the  interest  on  the  loan.  And, 
like  the  annual  cash  value,  it  has  the  abhorrent  vice  of 
teaching  a  man  to  consider  himself  first  and  his  family 
last.  Both  in  its  suggest! veness  and  in  the  pressure  of  its 
conditions,  it  leads  strongly  toward  lapse;  and  it  is  small 
wonder  that  so  few  loans  are  paid  and  so  many  lapses 
ensue. 

I  am  aware  —  none  better  —  that  I  have  spoken  to  you, 
gentlemen  commissioners,  against  an  almost  overwhelm- 
ing drift  of  practices  indulged  in,  not  because  they  truly 
develop  or  conserve  correct  principles,  but  because  they 
make  it  easy,  for  the  moment,  instead  of  hard,  to  get  busi- 
ness; because  in  place  of  unselfish,  persistent  self-sacri- 
ficing duty,  they  present  self-interest  and  a  speculation; 
not  because  upon  them  one  may  build  in  assured  sound- 
ness from  the  bottom  up,  but  because  one  may  thereby 
build  rapidly  and  brilliantly,  leaving  to  future  storms  the 
revelation  of  rock  or  sand  in  the  foundation  of  these  houses 
of  hope  for  the  families  of  our  land.  And  I  have  so  spoken 
to  you  because  as  the  recognized  and  lawful  guardians  of 
the  immeasurable  public  interest  in  these  things,  as  those 
who  are  presumed  and  bound  to  know  the  true  and  to 
discriminate  it  from  the  specious,  it  is  in  your  power  to 
create  a  public  intelligence,  a  public  opinion,  and  a  public 
conscience  which  will  not  always  see  the  truth  denied  nor 
made  of  non  effect. 


CHAPTER  XVIII 

EXPENSES   FOR   AGENTS l 

THE  premium  of  a  policy  of  life  insurance  is  composed 
of  two  parts  —  the  amount  necessary  to  provide  for  the 
obligations  assumed  in  the  policy  contract,  and  the  portion 
added  to  meet  the  expenses  of  conducting  the  business. 
The  net,  or  mathematical,  premium  is  based  on  a  mor- 
tality table  and  a  rate  of  interest  which  it  is  assumed  will 
provide  for  the  final  payment  of  claims  whether  they 
mature  in  the  near  or  distant  future.  The  expense  por- 
tion may  itself  be  divided  into  the  amount  required  to 
meet  the  home  office  cost  and  that  which  is  incurred  in 
maintaining  the  agencies. 

If  it  is  proposed  to  start  a  new  company,  the  question 
will  naturally  arise  whether  an  agency  force  is  indispen- 
sable in  order  to  secure  a  sufficient  number  of  members  to 
justify  the  necessary  cost  of  maintaining  an  office.  Whether 
in  the  future  such  a  company  can  be  established  on  a  per- 
manent and  satisfactory  basis  without  agents  may  be  a 
matter  of  opinion.  It  never  has  been  accomplished  in  this 
country,  and  reference  must,  therefore,  be  had  to  foreign 
corporations  of  this  character  for  information  on  this 
point. 

Four  English  companies  report  that  they  pay  no  com- 
missions. The  oldest  of  these  was  organized  in  1762, 
and  the  youngest  in  1835.  There  is  at  this  time  no 
company  organized  since  the  latter  date  which  is  now  in 
existence  and  attempting  to  conduct  its  affairs  without 

1  By  John  M.  Holcombe,  President  of  the  Phoenix  Mutual  Life 
Insurance  Company,  Hartford. 

254 


EXPENSES  FOR  AGENTS  255 

paying  commissions  for  securing  business  and  collecting 
premiums. 

The  oldest  and  best  known  of  the  British  companies  was 
organized  in  1762.  In  1839  it  had  about  $70,000,000  of 
outstanding  insurance  and  some  $50,000,000  of  assets.  It 
has  now  about  $41,000,000  of  outstanding  insurance  and 
some  $25,000,000  of  assets.  Its  career  has  been  a  very 
remarkable  one,  especially  in  the  low  cost  at  which  it  has 
furnished  insurance  to  its  members.  It  is  located  in  the 
heart  of  the  city  of  London,  within  easy  reach  of  some 
millions  of  people,  and  through  its  directors  and  policy- 
holders  has  a  wide  reputation  for  stability  and  for  all  those 
qualities  which  go  to  make  up  a  mutual  life  insurance 
company  satisfactory  to  its  members.  The  largest  num- 
ber of  policies  it  has  issued  in  a  single  year  in  the  past  five 
years  is  290,  representing  insurance  to  the  amount  of 
about  $1,200,000.  From  a  history  of  this  company  it 
appears  that  within  the  past  seventy  years  it  has  very 
materially  decreased  its  membership,  outstanding  insur- 
ance, and  assets. 

The  other  three  companies  referred  to  have  made  but 
little  progress  for  many  years.  When  these  companies 
were  organized  and  became  firmly  established  the  con- 
ditions were  so  different  from  those  which  now  exist  that 
no  conclusions  can  be  drawn  from  their  early  history 
which  can  be  applied  to  the  situation  which  would  to-day 
confront  those  who  would  organize  a  life  insurance  com- 
pany. So  far  as  actual  experience  is  a  guide,  it  does  not 
appear  that  such  a  corporation  could,  under  the  most 
favorable  circumstances,  secure  a  firm  foothold  without 
employing  agents. 

The  consideration  of  an  established  company  of  con- 
siderable size  may  now  be  taken  up.  If  its  members  are 
scattered  over  a  large  territory,  it  is  for  their  advantage, 
as  well  as  for  the  protection  of  the  corporation  itself,  to 
have  agencies  at  various  points,  in  order  that  they  may 
be  accommodated  in  the  payment  of  premiums  and  in 


256  YALE  READINGS  IN  INSURANCE 

taking  advantage  of  the  terms  of  policy  contracts.  If 
this  is  conceded,  then  a  part  of  the  agency  expenses  may 
fairly  be  said  to  pertain  to  outstanding  business.  But 
it  still  remains  that  in  a  modern  and  progressive  life 
insurance  company,  which  is  growing  in  membership  and 
resources,  a  considerable  cost  in  procuring  new  business 
is  incurred,  not  only  in  the  agencies  themselves  but  also 
in  the  conduct  of  the  home  office,  from  which  point  must 
emanate  the  materials  for  use  in  the  field.  Much  has  been 
said  of  late  about  the  interests  of  policy-holders,  and  it 
is  true  that  they  should  first  be  considered.  Yet  in  this 
very  question  the  fact  must  not  be  ignored  that  without 
new  business  a  company  will  be  in  a  condition  of  liquida- 
tion. It  is  clear  that  much  of  the  new  insurance  which 
has  been  and  is  being  placed  upon  the  books  of  some  of 
the  companies  has  cost  and  is  costing  more,  taken  by  itself, 
than  it  is  worth  to  the  old  members.  If,  however,  part  of 
these  expenditures  may  fairly  be  said  to  be  incurred  in 
the  establishment  of  an  agency  force,  looking  to  the  future, 
it  may  still  be  for  the  interests  of  policy-holders  that  new 
business  shall  be  acquired  at  what  may  appear  to  be  an 
excessive  cost. 

It  seems  to  be  a  well-established  fact  that  even  in  a 
large  community  people  will  not  to  any  considerable  extent 
voluntarily  apply  for  life  insurance.  If  by  education  the 
people  generally  should  themselves  be  led  to  seek  life  in- 
surance, it  must  be  considered  what  would  be  the  result 
if  applicants  were  to  apply  from  considerable  distances. 
In  order  to  provide  for  absolute  safety  and  equity,  the 
members  of  a  life  insurance  company  must  be  chosen  from 
a  class  so  far  similar  in  occupations,  condition,  and  sur- 
roundings as  to  put  them  on  a  practical  equality,  or  else 
the  premiums  must  be  graded  according  to  the  risks 
assumed.  With  one  scale  of  premiums  it  is  very  evident 
that  those  persons  who  are  below  the  average  as  risks 
would  secure  good  bargains  if  they  could  get  protection  at 
the  rates  which  were  charged  for  select  lives,  and  unless  a 


EXPENSES  FOR  AGENTS  257 

company  guards  itself  very  carefully  against  the  admis- 
sion of  under-average  lives,  there  will  be  a  marked  in- 
equality, and  it  is  conceivable  that  disastrous  results  might 
follow.  Competent  and  honest  medical  examiners  must 
be  chosen  who  will  report  the  condition  of  applicants  with 
accuracy.  Moreover,  deceptions  can  be  practised  even 
upon  the  most  skilled  examiners,  and  it  is  essential  that  a 
company  shall  guard  itself  against  misrepresentations  in 
stating  the  particulars  called  for  in  an  application.  Faith- 
ful and  loyal  agents,  therefore,  are  necessary  to  produce 
those  results  which  are  in  accordance  with  equity  and  even 
financial  soundness;  so  that  it  is  clear  that  if  it  is  best  for 
a  company  to  secure  business  from  a  considerable  terri- 
tory, not  only  must  agents  bring  the  subject  of  life  insurance 
to  the  attention  of  the  people,  but  also  they  must  guard 
the  interests  of  the  company  in  the  applications  which 
are  made.  Old  policy-holders  may  well  pay  for  a  service 
which  shall  bring  among  their  number  new  lives  which 
shall  experience  a  favorable  mortality,  and  which  shall 
share  in  the  expenses  of  conducting  the  business. 

It  should  not  be  lost  sight  of  that  in  a  company  of  con- 
siderable age,  not  only  must  the  interests  of  the  older 
policy-holders  be  guarded,  but  also  that  those  who  have 
lately  taken  insurance  are  entitled  to  the  same  considera- 
tion. In  a  condition  of  liquidation  those  who  have  been 
long  insured  might  not  suffer  materially,  but  for  the  sake 
of  the  younger  members  the  distant  future  should  be 
foretold  as  accurately  as  possible.  If  an  agency  force  is 
desirable  in  the  interests  of  policy-holders,  then  it  is  also 
important  that  a  company  should  be  so  organized  as  to 
make  it  attractive  for  young  men  to  engage  in  agency 
work  to  take  the  places  of  those  who  will  from  time  to 
time  drop  out.  This  can  be  accomplished  only  by  main- 
taining a  strong  financial  condition,  by  issuing  attractive 
policy  forms  and  by  so  compensating  agents  as  to  make 
the  business  lucrative.  It  is  true  that  allowances  to  agents 
may  be  carried  to  such  an  extent  as  to  prejudice  the  rights 


258  YALE  READINGS  IN  INSURANCE 

of  policy-holders,  but  a  well-established  and  satisfied  body 
of  agents  is  of  very  great  importance  to  the  permanency 
and  the  well-being  of  such  an  institution. 

That  the  spread  of  life  insurance  protection  among  the 
people  is  beneficial  not  alone  to  those  who  enjoy  this  pro- 
tection, but  also  to  the  community  at  large,  cannot  well 
be  doubted.  It  should  be  kept  in  mind,  however,  that 
life  insurance  companies  are  not  benevolent  institutions 
and  they  have  no  right  to  use  the  funds  of  their  members 
except  for  those  purposes  for  which  premiums  are  paid. 

The  reasoning  which  should  be  brought  to  bear  upon 
this  whole  question  is  from  the  standpoint  of  the  policy- 
holders,  and  while  it  is  not  practicable  to  fix  definitely  a 
limit  for  agency  and  home  office  expenses  which  have  to 
do  with  acquiring  new  business,  it  may  be  said  that  these 
are  legitimate  if  they  do  not  go  beyond  the  point  where 
reasonable  returns  can  be  fairly  expected. 

The  cost  of  establishing  a  new  company  is  of  necessity 
greater  than  that  of  maintaining  an  old  one.  In  the  first 
these  expenditures  are  necessary.  On  the  other  hand,  it 
may  be  that  an  old  company  will  be  benefited  by  the 
enlargement  of  its  business,  in  which  case  an  investment,  so 
to  speak,  for  an  agency  plant  may  be  made  within  reason- 
able limits.  No  definite  rule  can  be  laid  down  on  this 
subject,  for  each  case  must  be  considered  in  connection 
with  the  circumstances  which  surround  it. 

Altogether  it  cannot  be  gainsaid  that  an  agency  organ- 
ization is  necessary  to  the  establishment  of  a  new  company 
or  to  the  perpetuation  of  an  old  one.  Whether  in  any 
particular  case  a  wise  investment  can  be  made  cannot  be 
told  with  certainty  by  mere  inspection  of  an  annual  state- 
ment. The  best  results  in  this  business  are  often  slow 
in  coming.  A  larger  inflow  than  can  be  thoroughly  cared 
for  may  appear  like  prosperity,  but  may  have  in  it  ele- 
ments of  inequity  or  danger.  The  obligations  imposed 
by  a  policy  contract  should  not  be  evaded  or  postponed, 
and  expenses  of  all  kinds  should  be  limited  to  those  sums 


EXPENSES  FOR  AGENTS  259 

to  be  available  after  the  insurance  liabilities  are  fully  pro- 
vided for.  Within  this  limit  sound  principles  will  not  be 
violated  by  wise  investments  in  intelligent  and  reliable 
agency  forces,  to  which  an  increased  revenue  may  be 
expected  at  a  decreased  ratio  of  expense. 


CHAPTER  XIX 

DISTRIBUTION    OF   SURPLUS  * 

THE  ideal  of  the  contribution  method  for  the  distribu- 
tion of  the  surplus  of  a  mutual  company  is  the  return  to 
each  member  of  such  share  of  the  surplus  as  has  been  con- 
tributed by  him.  To  this  ideal  no  exception  can  be  taken. 
Those  who  question  the  value  of  the  method  do  so,  not 
because  they  question  the  equity  of  returning  to  each 
member  what  his  payments  have  contributed  to  the  surplus, 
but  because  they  do  not  admit  that  by  the  application 
of  this  so-called  contribution  method,  as  usually  prac- 
tised, this  ideal  result  is  reached  with  essentially  greater 
accuracy  than  by  other,  and  perhaps  simpler,  methods. 

The  application  of  this  method,  as  usually  explained, 
viz.,  to  credit  each  member  annually  with  the  reserve  or 
previous  accumulation  from  his  payments,  the  premium 
paid  and  the  interest  earned,  and  to  debit  him  with  his 
share  of  the  losses  and  expenses  of  the  company  and  with 
the  reserve  or  sum  which  must  be  set  aside  to  provide  for 
a  deficiency  in  the  premium  or  the  maturity  of  the  policy 
in  future,  seems  sufficiently  simple;  and  so  it  is,  merely 
as  a  book-keeping  direction.  But  the  determination  of 
the  equitable  amount  to  be  so  debited  on  account  of  ex- 
penses is  one  of  the  most  perplexing  questions  with  which 
the  actuary  has  to  deal. 

It  is  of  the  very  essence  of  the  contribution  method  that 
no  member  or  class  of  members  shall  be  made  to  pay  for 

1  By  Daniel  H.  Wells,  Actuary  of  the  Connecticut  Mutual  Life 
Insurance  Company,  Hartford.  Reprinted  with  additions  from  pages 
361-368,  Volume  II,  "  Transactions  of  the  Actuarial  Society  of  America." 

260 


DISTRIBUTION  OF  SURPLUS  261 

the  insurance  furnished  to  any  other  member  or  class  of 
members;  that  the  cost  of  insurance  shall  not  be  increased 
to  any  individual  or  class  because  of  the  insurance  of  any 
other  individual  or  class.  Thus  the  reserves  of  the  paid-up 
business  should  not  be  burdened  with  the  expense  of  pre- 
mium collections,  nor  the  expense  of  handling  such  reserves 
assessed  against  the  margins  or  loadings  of  premiums  on 
premium-paying  business.  Newly  selected  lives  should 
not  be  required  to  share  the  heavier  death  cost  of  those 
longer  insured,  nor  the  old  members  the  reasonable  cost  of 
bringing  the  benefits  offered  by  the  company  to  the  notice 
of  new  members. 

We  shall,  perhaps,  all  agree  that  the  expense  of  caring 
for  investments  should  be  paid  out  of  the  income  from 
investments.  I  do  not  think  it  necessary  to  discuss  this 
point  at  length,  but  only  to  emphasize  it,  that  it  may  not 
appear  as  a  disturbing  factor  in  the  remaining  discussion. 
All  forms  of  insurance  which  involve  a  reserve,  or  accumu- 
lation of  assets,  are  necessarily  and  inseparably  connected 
with  investment.  But  this  does  not  seem  to  me  to  warrant, 
certainly  not  to  require,  that  the  expense  attending  the 
investments  should  be  paid  otherwise  than  out  of  the 
earnings  of  such  investments.  The  man  who  chooses  insur- 
ance as  an  investment,  or  a  form  of  insurance  which  in- 
volves large  accumulations,  has  no  right  to  ask  that  the 
expense  attending  the  handling  of  funds  held  for  his  benefit 
shall  be  paid,  in  whole  or  in  part,  by  those  who  insure  under 
other  plans.  On  the  other  hand,  his  funds  should  not  be 
taxed  for  the  payment  of  expenses  other  than  those  charge- 
able to  their  care,  on  the  plea  that  from  the  nature  of  the 
business  the  company  is  able  to  make  long  or  permanent 
investments,  and  so,  perhaps,  to  realize  somewhat  better 
returns  than  investment  companies  generally.  Such  con- 
ditions are  not  inseparable  from  insurance  contracts,  and 
if  one  chooses  to  invest  under  such  limitations  he  is  en- 
titled to  any  advantage  to  be  derived  from  them. 

Dismissing  now  the  matter  of  investments  and  invest- 


262  YALE  READINGS  IN  INSURANCE 

ment  expenses,  let  us  consider  those  expenses  which  have 
to  do  with  what  we  may,  for  convenience,  call  pure  insur- 
ance. In  common  with  all  insurance,  life  insurance  is  but 
a  device  for  the  wide  distribution  of  losses,  so  that  the  loss 
which  would  embarrass  or  crush  the  individual,  being  dis- 
tributed among  the  multitude,  is  borne  by  them  without 
serious  inconvenience.  The  service  rendered  is  measured 
by  the  risk  covered ;  the  amount  of  the  loss  insured  against 
multiplied  by  the  probability  of  the  occurrence  of  the  loss 
-the  death  cost.  If  the  expense  incurred  were  propor- 
tional to  this  benefit,  there  would  be  no  room  for  question 
as  to  the  proper  assessment  of  it.  But  to  assess  the  ex- 
pense in  proportion  to  the  benefit,  wholly  without  regard 
to  the  cost  of  rendering  the  service,  seems  to  me  to  be  an 
abandonment  of  the  principle  of  the  contribution  method 
(the  return  to  each  member  of  such  share  of  the  surplus  as 
has  been  contributed  by  him)  altogether.  We  are  bound 
to  assume  that  the  expense  incurred  is  reasonable,  and 
necessary  to  the  conferring  of  the  desired  benefit.  Why, 
then,  should  others  be  taxed  to  pay  it? 

Disregarding  for  the  present  the  distinction  between 
old  and  new  business,  we  note  that  certain  items  of  ex- 
pense —  expenses  incurred  for  the  general  supervision,  care, 
protection,  and  extension  of  the  business,  such  as  salaries 
of  officers  and  of  a  considerable  part  of  the  clerical  force, 
legal  expenses,  most  of  the  cost  of  advertising  and  sup- 
plies, a  part  of  the  expense  for  postage,  telegraphing,  etc., 
and,  perhaps,  a  part  of  the  taxes  and  fees  paid  —  are  de- 
pendent, in  a  general  way,  upon  the  magnitude  of  the 
interests  at  risk,  rather  than  upon  the  number  of  indi- 
vidual policies,  the  amount  insured  under  individual  poli- 
cies, or  the  premium  rates.  That  is  to  say,  the  larger  the 
interests  at  risk,  the  greater  the  labor  and  expense  which 
must  necessarily,  or  may  profitably,  be  devoted  to  such 
matters;  although  such  labor  and  expense  are  not  directly 
dependent  upon  the  number  of  the  insured  or  of  the  policies 
upon  the  company's  books,  as  are  in  large  part,  for  instance, 


DISTRIBUTION  OF  SURPLUS  263 

the  expense  of  medical  examinations  and  the  clerical  labor 
of  keeping  the  agency  accounts;  nor  upon  the  premium 
rates,  as  to  a  large  extent  agency  commissions  are.  There 
is  no  controlling  reason  for  the  assessment  of  such  general 
expenses  pro  rata  of  the  membership,  the  policies  in  force, 
the  amount  insured,  or  the  premium  income.  As  invest- 
ment expenses,  which  depend  in  a  like  general  way  upon 
the  magnitude  of  the  investments,  are  properly  assessed 
pro  rata  of  the  income,  the  benefit  earned,  and  not  of  the 
individuals  interested,  so  it  would  seem  the  most  equitable 
way  to  assess  these  general  insurance  expenses  pro  rata  of 
the  insurance  benefit  received,  the  death  cost,  or  "cost  of 
insurance." 

I  am  aware  that  it  has  been  urged  against  the  assess- 
ment of  expenses  on  the  death  cost,  that  it  makes  the 
expense  on  some  forms  of  policies  increase  with  the  age. 
Probably  this  has  had  something  to  do  with  the  introduction 
of  the  more  usual  practice  of  assessing  such  general  ex- 
penses pro  rata  of  the  amount  insured.  But  if  the  death 
rate  at  age  65  is  four  times  the  death  rate  at  age  40,  it  is 
certain  that,  assuming  the  same  amount  at  risk  on  each 
life,  the  company  assumes  four  times  as  great  a  risk  on, 
renders  four  times  the  service  to,  a  life  aged  65  as  to  one 
aged  40.  The  insurance  of  a  given  number  of  lives  at  65 
would  involve  as  great  a  probable  loss,  with  double  the 
probable  fluctuation,  as  the  insurance  of  four  times  that 
number  of  lives  aged  40.  Would  not  essentially  as  great 
care  and  expense  in  the  supervision  of  the  business,  in 
the  selection  of  territory,  of  agents,  of  forms  of  contract, 
in  the  investigation  and  settlement  of  the  equally  numer- 
ous claims,  in  all  the  varied  expenditures  required  for  the 
replacing  of  the  business  lost  by  death  and  otherwise,  be 
as  necessary  or  advisable  in  the  first  case  as  in  the  second? 
And  finally,  while  we  cannot  justly  disregard  the  cause  or 
origin  of  the  expense,  it  is  better  to  err  in  the  assessing  of 
it  by  making  it  follow  more  closely  the  benefit  rendered 
than  to  err  in  the  opposite  direction. 


YALE  READINGS  IN  INSURANCE 

Certain  other  items  of  expense,  such  as  collection  fees, 
the 'bulk  of  agents'  commissions,  exchange,  and  taxes  on 
gross  premiums,  are  based  upon  the  premiums  collected, 
and  may,  properly,  and  without  serious  practical  diffi- 
culty, be  so  assessed. 

Medical  examinations  and  a  part  of  the  expense  for 
clerical  labor  attach  to  policies,  with  but  little  or  no  refer- 
ence to  the  amount  insured,  the  premium,  or  the  risk.  If 
such  expenses  cannot  be  assessed  against  the  individual 
policies,  and  such  a  course  is  impracticable  under  existing 
conditions  and  perhaps  undesirable  under  any  conditions, 
the  death  cost  furnishes  the  best  basis  for  their  assessment. 
The  medical  examination,  while  exacted  as  a  necessary 
condition  of  membership,  and  so  properly  to  be  assessed 
against  the  applicant,  is  intended  to  protect  the  members 
of  the  company  against  the  introduction  of  under-average 
risks  and  an  increased  death  rate;  and  so  is  for  their  pro- 
tection and  benefit  in  proportion  to  their  proper  share  of 
the  death  cost.  The  expense  for  such  clerical  labor  as  has 
direct  relation  to  individual  policies  is  but  small,  and  may 
be  assessed  on  the  death  cost  at  least  as  equitably  as  on 
the  amount  insured  or  the  premiums. 

It  seems  to  me,  therefore,  that  the  equity  which  is  the 
aim  of  the  contribution  method,  is  most  nearly  attained 
by  an  assessment  upon  the  investment  income  to  pay 
all  investment  expenses,  upon  premiums  to  cover  such 
expenses  as  are  determined  by  the  premiums,  and  upon 
the  death  cost,  or  what  is  technically  called  the  cost  of 
insurance,  to  cover  all  other  expenses. 

The  cost  of  procuring  new  business  has  been  increased 
by  excessive  competition  until  it  has  become  a  very  seri- 
ous tax  upon  the  companies.  I  do  not  attempt  at  this 
time  to  set  a  limit  to  the  expense  which  may  be  legitimately 
incurred  for  the  procuring  of  business.  I  have  to  do  only 
with  the  proper  assessment  of  such  expense.  Whatever 
may  be  the  cost  of  bringing  insurance  to  the  attention  of 
the  public,  or  the  value  of  the  new  insurance  placed,  its 


DISTRIBUTION  OF  SURPLUS  265 

value  is  to  those  insuring  or  their  beneficiaries,  not  to 
those  previously  insured.  It  is  true  that  some  slight  ad- 
vantage may  accrue  to  the  existing  membership  from  the 
broadening  of  the  field  for  the  operation  of  the  law  of  aver- 
age; and,  in  theory,  some  slight  decrease  in  the  expense 
rate  might  be  possible  later  from  the  increase  in  volume 
of  business.  But  certainly  any  such  incidental  advantage 
to  the  existing  membership  is  more  than  offset  by  the 
advantage  to  the  incoming  member.  He  cannot  in  fair- 
ness ask  that  the  special  expense  involved  in  bringing  the 
benefits  of  the  company  to  him  should  be  shared  by  the 
existing  membership  on  the  plea  that  his  incoming  broadens 
the  field,  when  the  existing  membership  constitute  the  field 
to  which  he  only  adds  his  mite;  when  the  benefits  to  him 
from  the  existence  of  such  a  membership  are  a  hundred 
thousand  times  any  benefit  he  can  confer  upon  them.  It 
is  certainly  sufficient  that  he  be  admitted  to  the  common 
advantages  of  a  more  stable  experience  and  a  decreased 
expense  ratio,  if  such  result,  without  requiring  that  others 
be  taxed  to  pay  the  cost  of  giving  him  these  advantages. 
The  assessing  upon  the  old  business  of  the  expense  of  pro- 
curing new  business  cannot  then  be  justified  either  upon 
the  ground  that  the  expense  is  due  to,  or  is  for  the  benefit 
of,  the  old  business. 

It  is  a  difficult  matter  to  analyze  the  expenses  of  the 
company  with  which  one  is  officially  connected,  and  with 
whose  operations  one  is  personally  familiar,  and  arrive 
at  a  fairly  approximate  estimate  of  the  expense  directly 
or  indirectly  due  to  the  writing  of  new  business.  It  be- 
comes an  impossibility  in  the  case  of  other  companies. 
Yet  I  think  I  am  warranted  in  saying  that  the  average 
expense  cost  of  new  business,  other  than  term  business,  as 
now  written  by  our  life  companies,  including,  so  far  as 
chargeable  to  new  business,  commissions,  salaries  of  man- 
agers of  agencies,  superintendents  and  special  agents, 
traveling  expenses,  salaries  of  medical  directors,  medical 
examinations,  advertising,  rents,  salaries  of  officers  and 


266  YALE  READINGS  IN  INSURANCE 

clerks,  etc.,  is  probably  over  rather  than  under  $30  per 
$1000  of  new  business  on  which  a  full  year's  premium  is 
collected.  Against  this,  the  cost  of  caring  for  old  business, 
exclusive  of  investment  expenses,  is  probably  considerably 
under  $3  per  $1000,  and  the  saving  from  the  lighter  mor- 
tality on  the  new  business  for  the  first  three  or  four  years 
after  its  issue  does  not  exceed  an  average  of  about  $7  per 
$1000.  Deducting  the  sum  of  these  from  the  expense  of 
new  business,  we  still  have  a  balance  of  at  least  $20  per 
$1000,  to  be  provided  for  before  the  new  business  would 
be  entitled  to  share  on  the  same  basis  as  the  old  in  the  dis- 
tribution of  surplus.  These  figures  are  in  the  rough,  but 
they  will  serve  the  purpose  of  illustration. 

If,  now,  a  company  writes  $100,000,000  of  continuing 
new  business,  on  the  average  not  less  than  $2,000,000  is 
sunk,  planted  if  you  prefer,  for  the  time  being,  in  excess  of 
all  that  will  be  recovered  from  a  reduced  mortality,  and 
under  the  present  method  of  valuation  the  surplus  is  de- 
creased by  at  least  that  amount  to  the  injury  and  loss  of 
the  existing  business.  This  sum  is  only  recovered  through 
a  decrease  in  future  dividends  on  the  business  so  written, 
through  future  expenditures  for  the  procuring  of  other  new 
business.  The  existing  membership  is  continually  taxed 
for  the  procuring  of  new  business,  and  no  corresponding 
tax  laid  upon  such  new  business  in  the  future  can  ever 
adjust  the  injustice  done  to  the  continually  changing  exist- 
ing membership.  Further,  the  cost  of  new  business  is  so 
large  that  no  matter  what  may  be  assumed  to  be  its  value 
to  the  company  or  to  the  insured,  a  limit  is  put  upon  the 
amount  a  company  can  afford  to  write,  varying  with  the 
size  and  surplus  of  the  company. 

The  most  satisfactory,  and  indeed  the  only  satisfactory 
way  of  dealing  with  the  matter  seems  to  me  to  be  to  make 
the  initial  expense  (and  all  the  expense)  of  the  business 
an  element  of  our  computations.  A  necessary  and  reason- 
able expense  in  the  securing  of  new  business,  as  well  as 
every  other  necessary  expense,  may  as  properly  betaken 


DISTRIBUTION  OF  SURPLUS  267 

into  account  in  the  computation  of  premiums,  reserves, 
surrender  values,  surplus,  etc.,  as  may  death  claims,  and 
should  be  so  taken  into  account.  It  is  time  to  do  away  with 
the  idea  that  all  expenses  and  contingencies  are  to  be  pro- 
vided for  by  a  more  or  less  arbitrary  loading  or  margin 
added  to  the  computed  premium,  and,  lest  that  should 
prove  insufficient,  by  further  holding  an  enormous  undi- 
vided surplus;  and  to  provide  for  them  in  a  more  rational 
manner  by  suitably  modifying  our  fundamental  assump- 
tions and  computations. 

A  life  insurance  company  has  two  sources  of  income: 
the  premiums  paid  by  its  members,  and  the  earnings  of  its 
investments.  These  must  suffice  to  provide  for  the  policy 
claims  and  the  expenses  of  the  business ;  the  latter  as  truly 
and  as  certainly  as  the  former.  If  all  investment  ex- 
penses, and  all  taxes  and  losses  on  investments,  are  to  be 
charged  against  the  earnings  on  investments,  as  they 
should  be,  the  rate  of  interest  assumed  in  the  computations 
should  be  such  as  the  company,  so  far  as  human  foresight 
can  avail,  will  be  certain  to  realize,  net,  over  all  such 
expenses,  taxes,  and  losses. 

As  ample  provision  should  be  made  for  investment  ex- 
penses in  the  assumption  of  the  interest  rate,  and  not  by 
an  arbitrary  addition  to  the  premium,  so  ample  provision 
should  be  made  for  such  of  the  ordinary  and  continued 
insurance  expenses  as  are  properly  assessable  upon  the 
death  cost  by  a  loading  of  the  death  rate  or  mortality 
table.  For  the  ready  and  equitable  distribution  of  the 
surplus,  the  mortality  table  should  express  the  relative 
probabilities  of  death  at  different  ages.  It  is  not  neces- 
sary that  it  should  express  the  actual  probability  of  death, 
but  only  that  the  actual  probability  should  bear  a  fixed 
and  known  ratio  to  that  given  by  the  table.  The  table 
used  should,  then,  represent  a  fixed  per  cent,  of  the  prob- 
able mortality  at  each  age,  such  per  cent,  being  taken  high 
enough  to  provide  amply  for  all  the  ordinary  expenses 
properly  assessable  upon  the  death  cost  as  well  as  for  the 


268  YALE  READINGS  IN  INSURANCE 

death  cost  itself.  An  addition  of  25  per  cent,  to  the  prob- 
able mortality  after  the  expiration  of  the  first  five  years 
of  insurance  should  be  more  than  sufficient.  To  the  pre- 
mium computed  on  the  basis  of  the  assumed  interest  rate 
and  the  modified  mortality  table  should  be  added,  as  a 
provision  for  the  first  cost  of  new  business,  an  annuity, 
contemporaneous  with  the  premium  payments,  the  present 
value  of  which  is  equal  to  the  necessary  first  cost  of  such 
new  business  in  excess  of  the  subsequent  annual  expense 
and  of  the  gain  in  the  first  two  or  three  years  from  a  favor- 
able mortality.  The  sum  so  found  should  be  increased 
by  a  small  per  cent,  to  provide  for  such  continued  expense 
as  may  be  assessable  against  the  premium. 

In  the  computation  of  the  premium  we  have  provided, 
in  what  seems  to  me  a  rational  way,  for  (a)  the  first  special 
expense  of  the  business,  (6)  a  percentage  charge  against 
the  premium  year  by  year  to  cover  expenses  so  assessed, 
(c)  a  margin  of  income  from  investments  to  cover  invest- 
ment expenses,  (d)  a  percentage  of  the  death  cost  to  cover 
other  expenses,  and  (e)  policy  claims.  If  it  is  thought 
more  equitable  to  assess  general  expenses  upon  the  amount 
insured  rather  than  upon  the  death  cost,  it  is  only  neces- 
sary to  add  to  the  premium  computed  upon  the  unmodi- 
fied mortality  table  and  the  assumed  rate  of  interest  an 
annuity  for  the  premium-paying  term,  the  present  value 
of  which  is  equal  to  the  present  value  of  an  annuity  equal 
to  the  expense  to  be  provided  for  and  running  through  the 
term  of  the  policy,  instead  of  increasing  the  assumed 
mortality. 

The  proper  reserve  would  be  the  single  premium  for  the 
insurance,  less  the  present  value  of  the  future  premiums 
receivable,  if  any,  deducting  from  such  premiums,  however, 
for  purposes  of  valuation,  the  final  percentage  loading, 
which  was  added  to  provide  for  certain  continuing  annual 
expenses,  and  presumably  will  be  needed  for  that  purpose, 
which  loading  is  not  offset  by  any  corresponding  loading 
of  the  single  premium.  The  computation  should  be  based 


DISTRIBUTION  OF  SURPLUS  269 

upon  the  modified  mortality  table  and  the  assumed  rate 
of  interest.  A  reserve  so  computed  would  take  account 
of  the  necessary  cost  of  new  business,  so  that  such  cost 
would  not  be  at  the  expense  of  the  existing  membership, 
and  would  also  provide  for  all  the  expense  attending  paid- 
up  business.  Under  such  a  computation  of  premiums  and 
reserves  there  should  be  no  need  of  any  considerable  amount 
of  undivided  surplus.  Contingencies  and  expenses  are 
otherwise  provided  for.  Sufficient  surplus  only  is  needed 
to  serve  as  a  balance-wheel  to  enable  the  company  to  pay 
a  uniform  dividend  undisturbed  by  temporary  fluctuations 
of  values  and  mortality. 

The  foregoing  is  a  very  simple  statement  of  what  seem 
to  me  the  principles  which  should  guide  in  the  distribu- 
tion of  the  surplus  and  the  determination  of  the  requisite 
reserve  of  a  mutual  life  insurance  company.  In  applying 
these  principles  in  practice  all  sorts  of  difficulties  will  be 
met  with.  I  venture  to  refer  to  some  of  them. 

Investment  income  earned  will  vary  in  rate  in  case  of 
an  established  company  iDut  slowly,  and  can  be  to  some 
extent  forecast.  Death  claims  may  vary  irregularly  by 
considerable  amounts  year  by  year;  but  it  is  to  be  remem- 
bered that  it  is  the  risk  of  death  the  company  insures 
against,  and  just  as  in  the  case  of  an  individual  the  com- 
pany does  not  make  the  cost  to  him  dependent  upon  his 
living  through  a  given  year,  so  in  the  case  of  100,000 
individuals  it  should  not  necessarily  vary  the  cost  to  them 
of  the  risk  assumed  according  as  more  or  less  of  them  die 
in  a  given  year.  The  number  dying  in  any  year  may 
assist  in  determining  the  risk  of  death  age  by  age,  but  does 
not  determine  it.  A  reasonable  surplus  should  be  carried 
to  provide  against  fluctuations,  and  serve  as  capital  for 
the  prosecution  of  the  business. 

Again,  a  uniform  or  slowly  decreasing  cash  payment  is 
very  desirable.  The  desirability  of  a  fixed  income  from  a 
given  investment  is  recognized  by  almost  every  reliable 
and  well-established  financial  corporation  in  existence. 


270  YALE  READINGS  IN  INSURANCE 

The  shares  of  any  railroad  or  other  corporation  would 
very  quickly  decline  in  value  if  the  dividends  of  its  stock- 
holders varied  year  by  year  according  as  the  year  chanced 
to  be  more  or  less  prosperous.  So  it  is  desirable  that  the 
cost  under  a  life  insurance  policy  should  not  vary  greatly 
from  year  to  year  but  should  be  substantially  uniform. 
A  carefully  determined  scale  of  dividends  should  not,  there- 
fore, be  lightly  thrown  aside  because  for  a  given  year  the 
business  has  been  more  or  less  prosperous. 

The  method  of  distributing  its  surplus  in  case  of  a  mutual 
company  should  also  take  account  of  the  history  and  tra- 
ditions of  the  company.  What  method  have  its  members 
been  led  to  expect?  What  method  has  been  tacitly  agreed 
upon  among  themselves  by  the  past  history  of  the  com- 
pany and  the  results  with  which  they  are  familiar  under 
different  classes  of  policies?  Do  not  hastily  substitute 
your  individual  opinion  of  what  is  right  and  proper  for  the 
custom  of  years  past  approved  by  the  bulk  of  the  members. 

Competition,  too,  is  to  be  considered.  It  may  be  that 
a  given  kind  of  business  must  be  done  at  a  given  cost  or 
not  at  all,  and  one  may  be  driven  to  consider  whether  it 
is  wise  to  do  a  certain  class  of  business  at  the  price  at  which 
it  can  be  done. 

Freedom  in  the  choice  of  methods  of  distributing  surplus 
may  be  limited  by  legal  enactments.  If  such  enactments 
do  not  meet  your  views  of  what  is  right  and  proper  you 
may  strive  for  their  repeal  or  modification,  but  so  long  as 
they  remain  as  legal  enactments  it  is  the  duty  of  a  good 
citizen  to  conform  to  them. 

The  above  are  by  no  means  the  only  difficulties  that 
beset  the  path  of  one  who  endeavors  honestly  to  determine 
to  whom  and  in  what  proportions  the  surplus  of  a  mutual 
life  insurance  company  belongs,  but  they  will  perhaps 
serve  as  illustrations.  Remembering,  then,  that  the  pre- 
ceding is  only  a  statement  of  general  principles  to  be  applied 
to  each  particular  case  as  circumstances  permit,  we  may 
proceed  to  apply  it  to  an  assumed  case. 


DISTRIBUTION  OF  SURPLUS  271 

Let  us  assume  that  the  company  earns  a  net  income, 
after  providing  for  the  cost  of  its  investments,  of  4J  per 
cent.;  that  its  death  losses,  less  the  liability  from  which 
it  is  relieved  by  the  payment  of  them,  are  75  per  cent,  of  the 
tabular  cost  of  insurance  or  contribution  to  death  claims; 
that  it  reserves  on  the  basis  of  the  American  Table  of  Mor- 
tality and  3  per  cent,  compound  interest;  and  that  it  is 
required  to  find  the  tenth  annual  dividend  per  $1000 
on  20-payment  life  policies  issued  at  age  35  at  a  premium 
rate  of  $36.20.  For  convenience  of  reference  we  add  that 
the  reserve  at  the  end  of  the  ninth  year  upon  such  a  policy 
is  $226.31  per  $1000,  and  that  at  the  end  of  the  tenth 
year  is  $255.78  per  $1000;  and  that  the  cost  of  insurance 
for  the  tenth  year  is  $8.06.  Let  us  assume,  also,  that  the 
cost  of  new  business  less  the  saving  in  mortality  is  $20  per 
$1000  in  excess  of  the  subsequent  cost.  This  $20  equals 
an  annuity  of  $1.42  a  year  through  the  premium-paying 
period,  which,  having  been  appropriated  already,  reduces 
the  effective  premium  to  $34.78.  Let  us  assume  that  the 
expenses  chargeable  to  the  premiums  upon  the  business 
as  a  whole  are  1\  per  cent,  of  such  premiums,  and  those 
chargeable  to  the  cost  of  insurance  are  20  per  cent,  of  such 
cost.  The  dividend,  then,  may  be  found  as  follows: 

Reserve  at  the  end  of  the  9th  year $226.31 

Plus  the  effective  premium     34.78 

Plus  interest  for  a  year 11.10     $272.19 

Less  reserve  at  the  end  of  10th  year $255.78 

7£  per  cent,  of  the  premium 2.72 

95  per  cent,  of  the  cost  of  insurance 7.66      $266.16 

Leaving  a  dividend  of $6.03 

The  mathematical  work  may  be  somewhat  abbreviated, 
and  the  form  of  it  will  depend  somewhat  on  the  means  at 
hand,  and  is,  of  course,  immaterial. 

The  method  suggested  of  determining  the  reserve  which 
a  company  should  make  has  not  come  into  use,  and  may 


272  YALE  READINGS  IN  INSURANCE 

be  dismissed  with  very  brief  reference.  It  substantially 
regards  business  on  the  books  as  an  asset.  In  view  of  the 
first  cost  of  such  business  it  is  such.  By  distributing  such 
first  cost  as  an  annuity  through  the  premium-paying 
period,  it  to  that  extent  equalizes  the  expenses  and  so  the 
annual  cost  of  the  insurance  while  still  making  it  a  charge 
against  the  individual  policy  on  account  of  which  it  was 
incurred.  In  the  event  of  the  surrender  of  the  policy, 
any  balance  of  such  cost  still  remaining  as  a  charge  against 
future  premiums  should  be  collected  as  a  part  of  the  sur- 
render charge. 


CHAPTER  XX 


DEFERRED   DIVIDEND   POLICIES 


THE  Blank  Life  Insurance  Company  is  prepared  to  in- 
sure lives  upon  a  method  which  has  never  before  been  prac- 
tised by  any  life  insurance  company,  and  which,  it  is  thought 
by  those  who  have  given  it  the  most  study  and  reflection, 
mil  render  life  insurance  popular  to  a  degree  hitherto  un- 
known. Government  bonds  and  bonds  and  mortgages  on 
real  estate  are  considered  by  many  persons  the  safest  kind 
of  investment.  They  regard  money  paid  for  insurance  of 
any  kind  rather  as  an  expense  than  as  an  investment  add- 
ing value  to  their  estates.  To  obviate  this  in  the  fullest 
degree,  the  present  method  has  been  devised,  which  is 
now  for  the  first  time  presented  to  the  public. 

Tontine  annuities,  which  were  first  made  attractive  by 
Lorenzo  Tonti  about  the  middle  of  the  seventeenth  cen- 
tury, have  become  exceedingly  popular  throughout  Europe 
and  in  some  parts  of  South  America.  A  tontine  is  quite 
the  reverse  of  life  insurance,  it  being,  in  fact,  a  combination 
of  persons  who  contribute  to  a  common  fund  which  shall 
be  enjoyed  by  the  survivors  only;  so  that  as  years  roll  on 
and  the  numbers  surviving  diminish,  the  income  is,  of 
course,  constantly  increasing  to  those  who  live,  until  the 
last  members  of  a  class  enjoy  most  extraordinary  advan- 
tages from  the  system.  In  1689  the  last  survivor  of  the 

1  Reprinted  from  a  circular  issued  in  1869  by  &  life  insurance  com- 
pany, announcing  a  new  scheme  of  declaring  dividends.  Since  so 
much  controversial  discussion  has  taken  place  over  deferred  dividends, 
it  has  been  thought  best,  since  it  detracts  nothing  from  the  value  of 
the  pamphlet,  to  omit  the  name  of  the  company  which  issued  it. 

273 


274  YALE  READINGS  IN  INSURANCE 

tontine  in  France,  a  widow,  just  before  her  death,  enjoyed 
an  income  equivalent  to  about  $20,000  of  our  money  for 
her  original  subscription  of  about  $80.  So  popular  has 
this  system  been  in  Europe,  that  governments  have  used 
it  for  the  purpose  of  raising  money  for  national  support. 
Those  who  invest  in  tontines  care  little  for  leaving  money 
to  those  who  may  come  after  them  (who  —  they  may  con- 
sider —  have  little  or  no  claim  upon  them),  and  prefer  to 
enjoy  while  living  a  large  annual  income,  which,  combined 
with  entire  safety,  their  money  could  not  produce,  in  the 
shape  of  interest,  in  any  other  way.  Life  assurance,  as 
has  already  been  observed,  is  quite  the  reverse  of  the 
tontine  principle,  and  the  arguments  which  induce  per- 
sons to  invest  in  securities  of  this  character  appeal  to 
higher  and  more  unselfish  motives  than  those  which  influ- 
ence investment  in  tontines.  The  apprehension  arises  in 
the  minds  of  many  persons  who  are  asked  to  assure  their 
lives,  but  who  have  not  given  life  assurance  much  study, 
that  in  case  of  a  long  life  the  investment  may  prove  a  bad 
one;  but  a  careful  investigation  will  prove  that  this  objec- 
tion is  not  well  founded.  We  have  before  us  a  policy  in 
one  of  the  leading  mutual  companies,  issued  more  than 
twenty-five  years  ago,  taken  out  originally  for  $5000,  on 
which,  when  the  policy  became  a  death  claim,  more  than 
$10,000  was  paid  by  the  company,  the  excess  over  the 
original  amount  of  the  policy  being  more  than  7  per  cent, 
interest  on  all  the  payments  received  by  the  company.  It 
is  proper  to  state  that  this  result  was  due  not  only  to  the 
marvelous  power  of  compound  interest,  but  also  to  the 
fortunate  increase  in  the  value  of  investments,  the  large 
return  of  surplus  premiums,  and  other  gains  incident  to 
the  business.  The  case  cited  is  not  an  isolated  one;  the 
same  thing  has  been  often  repeated  and  may  again  be 
repeated.  At  the  same  time,  it  must  be  acknowledged 
that  the  gain  from  investments  in  life  policies  is  greater 
in  the  case  of  early  death;  and  the  popular  mind  seeks 
for  some  simple  method  by  which  an  equalization  of  the 


DEFERRED  DIVIDEND  POLICIES  275 

benefits  of  life  insurance  can  be  secured,  whether  the  in- 
sured die  soon  or  late.  The  system  now  under  considera- 
tion, though  differing  from  either  tontine  or  life  assurance, 
combines  all  the  advantages  of  both,  and  has  been  brought 
out  under  the  supervision  of  two  mathematicians,  Mr. 
George  W.  Phillips  and  Mr.  Sheppard  Homans,  author  of  the 
contribution  plan  of  dividends.  This  system  is  known 
as  the  "Tontine-Dividend  System,"  under  which,  by  a 
skilful  adjustment  of  the  dividends,  a  recompense  is  given 
to  those  life  assurants  who  live  nearly  up  to  or  beyond  the 
period  known  among  actuaries  as  their  "expectation"  of 
life.  If  a  person  at  the  age  of  35  insures  his  life  in  a  com- 
pany for  $25,000  and  pays  a  premium  of  $659.50,  and  dies 
during  the  year,  while  theoretically  as  much  profit  is  made 
by  the  company  from  insuring  his  life  as  from  insuring  the 
lives  of  those  who  are  long  lived,  because  the  tables  are 
adjusted  to  meet  this  exigency,  still,  in  a  practical  sense, 
certainly  no  money  is  realized  from  the  individual  trans- 
action. It  would  appear  exceedingly  equitable  that  the 
person  who  dies  early,  and  whose  family  receives  the  face 
of  his  policy,  equal  to  a  profit  of  100,  500,  or  even  5000 
per  cent,  on  the  money  he  has  invested,  should  not  receive 
a  further  sum  in  the  shape  of  dividends,  and  that  those  who 
continue  to  pay  their  premiums  through  a  long  series  of 
years  should  have  the  benefit  of  the  accumulated  divi- 
dends, in  addition  to  the  face  of  their  policies  respectively, 
giving  them  a  profit  on  their  outlay  somewhat  approximating 
to  that  of  those  dying  early.  The  "Tontine-Dividend  Sys- 
tem" aims,  among  other  things,  to  accomplish  this  equitable 
distribution  of  surplus.  And  it  is  thought  by  the  Super- 
intendent of  Insurance  of  the  State  of  New  York,  Hon. 
Wm.  Barnes,  and  many  of  our  most  prominent  business  and 
financial  men,  that  it  will  popularize  life  assurance  to  a 
degree  hitherto  unknown. 

The  plan  as  applied  to  a  particular  case  is  simply  this: 
If  a  person  at  the  age  of  35  years  insures  his  life  for  $25,000, 
and  pays  the  annual  premium  of  $659.50,  interest  on  these 


276  YALE  READINGS  IN  INSURANCE 

annual  premiums  is  to  be  theoretically  compounded  at 
the  rate  of  10  per  cent,  per  annum,  until  such  premiums, 
with  interest  as  specified,  amount  to  the  face  of  the  policy, 
which,  at  the  age  mentioned,  would  be  in  15.5  years. 
During  the  intervening  period  the  company  issuing  the 
policy  makes  its  annual  dividends  on  this  and  all  other 
tontine  policies,  keeping  the  profits  on  the  same  separate 
from  the  rest  of  its  policies,  and  setting  them  apart  as  a 
fund  belonging  to  the  tontine  class,  but  not  payable  in 
any  case  until  the  end  of  the  specified  period  of  15.5  years, 
and  then  only  on  such  policies  as  shall  be  actually  in  force, 
those  policies  terminating  in  the  interval  receiving  no 
dividends.  The  person  holding  the  tontine-dividend  policy 
above  mentioned  will,  at  the  end  of  the  15.5  years,  begin 
to  benefit  by  the  dividends  already  declared;  and  further 
dividends  will  be  made  annually  thereafter  throughout 
the  remainder  of  the  term  of  the  policy.  These  dividends 
will  be  payable  in  cash,  thus  reducing  or  canceling  the 
annual  premiums,  and  afterwards  yielding  a  constantly 
increasing  cash  annuity  as  well.  It  has  been  calculated 
by  the  best  actuaries  that  the  dividends  on  such  policies 
will  be  three  or  four  times  greater  than  have  hitherto  been 
declared  by  any  company.  The  same  principle  is  applied 
to  policies  on  lives  at  other  ages;  the  distinctive  feature  being 
that  there  is  no  participation  in  profits  until  the  premiums 
paid,  compounded  at  10  per  cent,  interest,  equal  the  face  of 
the  policy,  and  then  the  survivors  receive  the  whole  accumula- 
tion of  profits. 

Persons  dying  during  the  non-dividend  period  receive 
the  amount  secured  by  their  policies  respectively  without 
further  profits. 

Persons  discontinuing  their  policies  prior  to  the  dividend 
period  receive  no  surrender  values  therefor. 

Policies  are  to  be  issued  at  the  rates  charged  in  the 
"Ordinary  Life  Table"  or  in  the  "Endowment  Table1' 
(with  twenty  years  or  more  to  run),  payable  in  either  case 
by  premiums  continuing  during  the  whole  term  of  the 


DEFERRED  DIVIDEND  POLICIES  277 

policy.  These  premiums  may  be  paid  annually,  semi- 
annually,  or  quarterly. 

This  plan  will  admit  of  a  number  of  variations;  for  in- 
stance (1),  the  division  of  profits  may  begin  at  the  end  of 
an  arbitrary  period  of  ten,  fifteen,  or  twenty  years;  or 
(2),  a  separate  class  of  policies  may  be  issued  on  either 
of  the  foregoing  plans,  upon  the  surrender  of  which  paid- 
up  policies  will  be  given  for  the  value  thereof,  in  case  the 
same  are  allowed  to  lapse  by  non-payment  of  premium 
before  the  dividend  begins,  but  on  which  no  dividends 
will  be  paid  in  case  of  death  before  the  dividend  period.  It 
is  not  to  be  expected,  however,  that  the  dividends  will  be 
as  large  as  in  the  previous  classes,  because  one  of  the 
material  sources  of  profit  is  diminished. 

In  order  to  carry  out  the  views  above  suggested,  the 
Blank  Life  Insurance  Company  has  determined  to  estab- 
lish for  its  assurants  tontine-dividend  classes,  which 
any,  who  may  hereafter  assure,  may  enter  on  giving  due 
notice  of  their  election  so  to  do. 

Class  A 

In  this  class  (designated  in  "application1'  and  "policy" 
as  Class  A),  policies  are  to  be  issued  at  the  rates  charged 
in  the  "Ordinary  Life  Table,"  or  in  the  "Endowment 
Table"  (with  twenty  years  or  more  to  run),  payable  in  either 
case  by  premiums  continuing  during  the  whole  term  of  the 
policy.  These  premiums  may  be  paid  annually,  semi- 
annually,  or  quarterly. 

No  dividends  will  be  paid  until  the  premiums,  with 
compound  interest  thereon,  at  the  rate  of  ten  (10)  per  cent, 
per  annum,  shall  amount  to  the  sum  assured  by  the  policy. 

In  case  of  death  before  the  dividend  period  begins,  the 
assured  will  receive  the  sum  secured  by  the  policy. 

The  society  will  allow  no  surrender  value  to  those  who 
give  up  their  policies,  or  dividends  on  those  policies  that 
may  become  death  claims,  before  the  dividend  period 
begins;  but  will  reserve  all  profits  resulting  from  such 


278  YALE  READINGS  IN  INSURANCE 

sources,  as  well  as  the  profits  accruing  upon  the  policies 
of  those  who  persevere  in  paying  their  premiums,  until  the 
premiums  paid  by  the  latter,  with  compound  interest 
thereon,  at  the  rate  of  ten  (10)  per  cent,  per  annum,  shall 
have  amounted  to  the  face  of  their  policies  respectively. 

The  dividends  then  are  to  be  equitably  adjusted  on  the 
contribution  plan  accordingly  as  each  class  and  age  has 
contributed  to  the  surplus,  and  paid  on  such  policies  as 
are  actually  in  force;  of  course  allowing  for  irregularities 
incident  to  a  small  number  of  policies  in  any  sub-class,  but 
faithfully  regarding  the  general  course  of  mortality  at 
different  ages  and  in  different  classes,  and  the  growth  of 
profits  as  affected  by  the  difference  in  the  length  of  time 
for  which  the  division  of  profits  at  the  various  policies 
shall  be  deferred. 

The  dividends  will  be  applied  to  the  reduction  of  sub- 
sequent premiums  falling  due  during  the  continuance  of 
the  policy,  and  in  case  of  a  surplus  after  doing  this,  as  is 
probable,  the  excess  to  be  applied  to  the  purchase  of  an 
annuity  to  continue  up  to  the  termination  of  the  policy. 

Annual  dividends,  thereafter,  will  swell  this  annuity, 
so  that  the  policy,  which  was  a  burden  in  its  early  years, 
will  yield  an  increasing  income,  payable  yearly  in  cash. 
It  is  estimated  by  the  most  competent  actuaries  in  this 
country,  that  dividends  on  policies  in  this  class  may  be 
more  than  three  times  as  great  as  have  hitherto  been  de- 
clared by  American  companies. 

Class  B 

In  order  to  meet  the  views  of  those  who  may  not  desire 
to  lose  the  privilege  of  receiving  a  value  for  their  policies, 
if  obliged  to  give  them  up  before  reaching  the  dividend 
period,  the  society  will  establish  another  class  (designated 
in  "application"  and  "policy"  as  Class  B),  in  which  the 
original  policies  will  be  exchanged  for  paid-up  policies 
according  to  the  rules  of  the  company. 

As  in  the  previous  class,  no  profits  will  be  paid  on  policies 


DEFERRED  DIVIDEND  POLICIES  279 

which  may  become  death  claims  before  the  dividend 
period  begins.  Although  the  final  dividends  in  this  class 
will  not  be  as  great  as  in  the  first,  still  they  will  be  much 
larger  than  those  which  have  been  hitherto  declared  by 
any  life  insurance  company. 

Class  C 

Again,  as  some  persons  may  prefer  to  have  their  divi- 
dends come  due  at  the  end  of  a  stipulated  term  of  ten, 
fifteen,  or  twenty  years,  policies  will  be  issued  containing 
such  a  stipulation,  but  in  other  respects  not  differing  from 
those  issued  in  Class  A.  (This  class  will  be  designated 
in  ''application"  and  "policy"  as  Class  C.) 

Class  D 

Policies  will  also  be  issued  on  which  the  dividends  will 
become  due  at  the  end  of  a  stipulated  term  of  ten,  fifteen, 
or  twenty  years,  but  in  other  respects  not  differing  from 
those  issued  in  Class  B.  (This  class  will  be  designated 
in  the  "application"  and  "policy"  as  Class  D.) 

The  profits  on  each  of  these  tontine  classes  (namely, 
those  in  which  neither  surrender  value  nor  paid-up  policies 
are  given  for  policies  surrendered  before  the  attainment  of 
the  dividend  period,  and  those  in  which  a  paid-up  policy 
for  a  certain  amount  is  given)  will  be  kept  separate,  so 
that  those  who  bear  the  greater  risk  will  receive  a  GREATER 

RECOMPENSE. 

In  the  payment  of  premiums  on  all  policies  in  the  ton- 
tine classes,  a  grace  will  be  allowed  of  as  many  months 
(not  exceeding  six)  as  will  correspond  to  the  age  of  the 
policy  in  years;  thus  the  payment  of  any  premium  for  the 
first  year  of  the  policy  may  be  deferred  for  one  month,  of 
any  premium  for  the  second  year,  two  months,  and  so  on, 
-  provided  that  in  all  cases  when  this  grace  is  availed 
of,  a  fine  at  the  rate  of  ten  (10)  per  cent,  per  annum  will 
be  exacted.  Thus  there  need  be  no  accidental  forfeiture 
of  a  policy,  and  the  greater  the  value  of  the  policy,  the 


280  YALE  READINGS  IN  INSURANCE 

longer  is  the  grace  allowed  for  the  payment  of  premiums 
upon  it. 

Such  is  the  proposed  system  of  tontine  dividends.  What 
are  its  advantages? 

It  will  be  seen  that  by  this  system,  if  an  assurant  dies  at 
any  time,  even  on  the  last  day,  before  the  period  is  reached 
when  participation  in  profits  begins,  his  representatives  will 
receive  more  than  ten  (10)  per  cent,  compound  interest  upon  the 
money  paid  into  the  society  for  premiums.  If  he  dies  within 
the  first  few  years  of  his  assurance  his  representatives  will 
receive  many  times  10  per  cent. ;  if  during  the  first  year  it 
may  be  5000  per  cent.  At  the  age  35,  on  a  life  policy,  the 
dividend  will  commence  in  15.5  years;  an  assurant  there- 
fore on  this  plan  may  secure  in  case  of  death  during  that 
time  a  10  per  cent,  investment  at  least.  And  afterwards, 
it  is  probable  that  on  such  a  policy  the  dividend  will 
not  merely  pay  the  premium  in  full,  but  secure  a  very 
comfortable  annuity  besides  to  the  assurant  during  his 
life. 

Now,  is  not  this  just  what  many  men  in  the  community 
•need  —  something  to  protect  their  families  in  case  of  sud- 
den early  death  —  an  investment  which  is  certain  to  pay 
ten  (10)  per  cent,  compound  interest  at  least  for,  say 
fifteen  years  (at  the  average  age  of  asssurance);  then 
afterwards  the  requirement  of  no  more  premiums,  the 
assurant  receiving  instead  a  considerable  annuity,  com- 
mencing just  at  the  time  when  age  begins  to  impair  the 
faculties  ? 

Does  not  this  plan  do  in  effect  what  the  policies  payable 
in  ten,  fifteen,  or  other  limited  number  of  annual  payments, 
aim  to  do  —  the  complete  paying  up  of  the  premiums 
during  the  productive  years  of  life,  and  the  securing  of  an 
income  from  the  policy  at  middle  life  and  in  old  age.  And 
though  the  tontine-dividend  policies  receive  no  dividend 
for  some  ten  or  fifteen  years,  yet  as  the  ordinary  life  pre- 
mium at  the  average  age  is  but  half  the  ten-year  premium, 
the  result  in  actual  outgo  on  a  tontine-dividend  policy 


DEFERRED  DIVIDEND  POLICIES  281 

will  be  more  satisfactory  than  that  on  a  ten-annual  pay- 
ment policy,  at  the  same  time  that  the  lightening  of  the 
pressure  of  the  payments  required  will  be  often  very 
desirable  during  the  first  year  or  two  of  the  policy,  when 
the  policy-holder,  perhaps  just  starting  in  business,  can 
spare  with  difficulty  the  amount  required  by  the  lowest 
tables. 

Again,  to  compare  the  tontine-dividend  system  with  the 
stock  system  without  profits,  is  it  not  better  to  pay  a  some- 
what higher  mutual  premium  for,  say  fifteen  years,  with 
the  expectation  that  after  that  time  not  only  will  no 
premiums  be  required,  but  that  a  very  considerable  income 
will  be  received  from  the  policy,  rather  than  to  pay  up  to 
the  very  end  of  a  long  life  —  as  a  penalty,  it  would  seem, 
for  superior  vitality  —  a  stock  premium,  somewhat  lower 
indeed,  but  without  the  least  abatement  in  old  age  ? 

It  would  seem  that  this  plan,  while  it  gives  the  class  who 
pass  the  dividend  period  all  the  advantages  of  the  mutual 
plan,  also  gives  them  all  the  benefits  of  the  stock  plan  as 
enjoyed  by  the  holders  of  stock  in  companies  of  that  kind; 
the  class  who  pass  the  dividend  period  obtain  their  insur- 
ance at  the  net  rate,  while  the  profits  of  those  policy-holders 
who  fail  to  pass  the  dividend  period  go  to  swell  the  annuity 
of  the  former,  which  same  profit  in  a  stock  company  would 
contribute  to  enlarge  the  dividends  of  the  stockholders. 

It  is  claimed  by  the  Blank  Company  that  the  system  of 
tontine  dividends  is  adapted  in  a  most  remarkable  man- 
ner to  the  wants  of  those  persons  who  have  mortgages  upon 
their  real  estate  which  they  may  either  not  care  or  not  be 
able  to  pay  off.  Their  unwillingness  may  be  owing  to  the 
fact  that  the  money  borrowed  is  more  valuable  to  them 
in  their  business  than  the  current  rate  of  interest  which 
they  pay  for  its  use;  their  inability  to  the  fact  that  their 
necessary  expenses  make  it  difficult  for  them  to  save 
enough  money  to  make  very  rapid  progress  in  removing 
the  mortgages.  In  either  case  the  apprehension  may  weigh 
heavily  upon  their  minds  that  in  case  of  their  sudden 


282  YALE  READINGS  IN  INSURANCE 

death  the  mortgages  might  prove  unfortunate,  if  not  disas- 
trous encumbrances,  at  a  time  when  all  available  moneys 
are  needed  in  winding  up  their  estates;  as  many  a  time 
a  mortgage  made  during  the  lifetime  of  an  owner  proves, 
in  case  of  his  death,  the  loss  of  the  entire  property  to  the 
family.  So  great  have  been  the  changes  produced  during 
the  last  ten  years  in  the  prices  of  living  and  the  general 
expenses  of  the  man  of  family,  that  many  persons  have 
been  anxious  to  buy  homesteads  rather  than  pay  the  large 
rents  and  suffer  the  inconveniencies  and  uncertainties 
incidental  to  the  rental  of  houses.  This  proceeding  would 
in  all  cases  probably  prove  a  wise  one  provided  the  per- 
sons in  question  could  be  guaranteed  a  long  life,  but  they 
have  frequently  been  obliged  heavily  to  mortgage  these 
homesteads  in  order  to  carry  out  and  fully  perfect  their 
plans.  The  reflection  which  is  sure  to  come  over  their 
minds  of  the  trouble  that  would  result  to  their  families 
in  the  event  of  their  sudden  death  often  causes  untold 
anxiety;  and  the  difficulty  they  experience  in  saving  from 
their  incomes  a  yearly  sum  sufficient  to  give  promise  of  a 
liquidation  of  such  mortgages  within  any  reasonable  time 
fills  them  with  evil  forebodings  for  the  future.  Now  it  is 
proposed  in  a  most  easy  and  simple  manner  to  obviate  all 
this  trouble.  Let  the  person  so  situated  insure  his  life 
on  the  tontine-dividend  plan  for  the  amount  of  his  mort- 
gage. While  the  sum,  as  before  mentioned,  which  may 
be  saved  year  by  year,  is  small  as  compared  with  the 
amount  of  the  mortgage,  it  may  still  be  enough  and  more 
than  is  necessary  to  pay  the  annual  premium  required  to 
cover  the  entire  amount  of  the  mortgage.  Having  done  so, 
the  person  may  dismiss  this  anxiety  entirely  from  his  mind, 
and  devote  himself  to  his  business  with  a  heart  free  from 
care,  for  he  then  knows  that  in  case  of  death  at  any  time, 
even  the  very  next  day,  his  policy  would  pay  off  his  mortgage. 
And  as  years  roll  on  and  he  reaches  the  period  when  the 
dividends  commence,  his  premium  will  be  almost  if  not 
entirely  extinguished,  and  the  annual  dividends  thereafter 


DEFERRED  DIVIDEND  POLICIES  283 

will  soon  yield  him  a  cash  annuity,  at  first  almost,  and 
then  entirely  sufficient  to  pay  the  interest  on  his  mortgage. 
So  that  the  policy,  which  was  first  and  during  the  produ- 
cing years  of  his  life  an  annual  expenditure  to  him,  may  in 
the  end,  as  fully  as  a  government  bond,  produce  a  yearly 
revenue  sufficient  not  only  to  pay  the  premium  on  the 
policy  but  interest  on  his  mortgage  and  prevent  the  same 
from  being  any  burden  to  him.  If  the  person  should  be 
able  to  spare  a  slightly  increased  premium,  it  would  be 
wise  for  him  to  take  a  "twenty-year  endowment  policy" 
instead  of  an  ordinary  life  policy.  The  same  advantages 
would  then  be  gained  with  the  additional  feature  that 
the  person  would  in  twenty  years,  if  then  living,  himself 
receive  the  amount  of  his  policy,  and  the  mortgage  could 
then  be  discharged,  instead  of  waiting  until  the  time  of 
his  death. 

The  same  principle  which  has  been  thus  described  in 
regard  to  the  owners  of  mortgaged  premises  applies  with 
equal  force  to  the  case  of  those  persons  who  may  have 
incurred  debts  which  they  are  at  present  unable  to  pay 
with  convenience,  but  for  the  satisfaction  of  which  they 
consider  it  both  their  duty  and  pleasure  to  provide,  if 
possible. 

The  arguments  supporting  the  tontine-dividend  sys- 
tem address  themselves  with  peculiar  force  to  many 
persons  who  are  in  the  possession  of  large  incomes.  These 
may  be  divided  into  two  classes:  (1)  those  who  are  pos- 
sessed of  large  assets,  and  who  enjoy  large  incomes  as  well, 
and  (2)  those  whose  large  expenses  during  their  business 
life  have  prevented  their  accumulating  much,  but  who 
are,  nevertheless,  earning  large  incomes  by  the  exercise 
of  their  hands  or  brains. 

Let  the  first  class  remember  that  their  estates,  as  a 
whole,  are  worth,  much  more  to-day,  if  they  are  living,  than 
to-morrow,  if  they  are  dead.  No  one  can  settle  an  estate, 
and  disentangle  the  meshes  in  which  a  man's  business  is 
oftentimes  entwined,  as  well  as  the  owner.  It  is  well 


284  YALE  READINGS  IN  INSURANCE 

known  to  most  business  men  that,  in  the  majority  of  their 
investments,  living  they  gain,  dying  their  representatives 
lose.  It  is  now  proposed  to  such  persons  to  cast  an  anchor 
to  windward.  Let  them  wisely  hedge  themselves  in  at 
least  one  of  their  investments.  Now  the  characteristics 
of  life  insurance  are,  in  some  respects,  directly  the  opposite 
of  those  we  have  described,  as  peculiar  to  most  other 
investments.  For  the  sake  of  the  parallel,  we  will  assume 
(what  nevertheless  is  untrue),  that  life  insurance  will  prove 
a  loss  to  the  person  who  lives  long;  for  no  one  will  deny 
that  in  the  event  of  his  dying  soon  it  will  be  a  large  gain; 
and  it  is  a  demonstrable  fact  that  this  gain  may  be  as  great 
as  100,  1000,  or  even  5000  per  cent,  on  the  actual  outlay. 
Thus  the  business  man,  who,  dying  early,  will  lose  to  his 
family  a  portion  of  his  investments,  may  by  the  same  stroke 
make  a  gain  to  them  of  a  sum  quite  as  large.  The  tontine- 
dividend  system  brings  this  argument  home  to  business 
men  with  greater  force  than  it  could  be  presented  by  the 
ordinary  system  of  life  insurance,  from  the  fact  that  the 
profits  upon  the  policies  of  this  class,  as  specified  above, 
will  probably  be  three  or  four  times  as  great  as  have 
hitherto  been  declared  by  any  life  assurance  company; 
and,  in  the  opinion  of  the  most  competent  judges,  a  policy 
of  this  kind  will  pay  a  remunerative  rate  of  interest,  in  the 
end,  upon  the  whole  investment. 

To  those  having  large  incomes,  but  who  have  not  accumu- 
lated sufficient  to  make  them  independent,  policies  of  this 
class  present  strong  attractions.  There  are  few  men  pos- 
sessing the  ability  and  industry  to  earn  annually  large 
sums  of  money,  and  having  great  and  constantly  increas- 
ing experience  and  knowledge  in  the  pursuits  to  which 
they  devote  themselves,  who  do  not  feel  a  confidence 
(provided  their  lives  are  spared)  that  they  will  be  able  to 
maintain,  and  even  enlarge,  their  power  to  produce  the 
same  results  during  the  early  and  middle  portion  of  their 
lives,  if  they  can  only  keep  their  minds  free  from  anxiety 
in  regard  to  the  future  prospects  for  their  families.  Such, 


DEFERRED  DIVIDEND   POLICIES  285 

however,  may  be  their  love  of  luxury,  and  their  determina- 
tion to  surround  themselves  and  their  families  with  present 
comforts,  that  they  may  not  see  any  practicable  way  of 
rapidly  providing  an  independent  competency  for  those 
they  leave  behind  them.  But  they  can  easily  save  a  suffi- 
cient amount  from  their  annual  incomes  to  insure,  as  the 
case  may  be,  for  either  10,000,  25,000,  50,000,  or  100,000 
dollars,  and,  having  done  so,  feel  quite  as  great  a  certainty 
that  their  families  will  be  provided  for  in  the  event  of 
early  death  as  if  they  were  possessed  of  an  equal  amount 
in  United  States  bonds,  or  other  marketable  securities. 
Such  persons  might  hesitate  before  using  the  sum  of  money 
which  would  be  required  to  pay  the  premiums,  in  any  way 
which  they  might  consider  an  expense,  but  it  would  seem 
a  most  wise  and  commendable  thing  for  them  to  invest 
such  money  in  a  tontine-dividend  policy,  which  will  be 
in  the  end  an  investment  as  profitable  to  them  as  a  gov- 
ernment bond  could  be,  and  which  possesses  the  power 
(to  be  found  in  no  other  kind  of  security)  of  providing  for 
their  families  a  sum  much  greater  than  the  amount  paid 
in  whenever  they  may  die.  There  is  no  kind  of  investment, 
excepting  life  insurance,  in  which  present  paj^ments  of 
trifling  amount,  and  the  promise  of  future  payments  while 
the  investor  lives,  are  received  in  full  satisfaction  for  the 
amount  deemed  necessary  for  the  support  of  a  family, 
which  is  paid  down  in  cash,  whether  the  death  occurs 
early  or  late. 

To  those  who  may  already  have  policies  upon  their 
lives,  issued  upon  any  of  the  plans  hitherto  practised  by 
life  insurance  companies,  it  is  thought  that  this  tontine- 
dividend  plan  presents  strong  arguments  for  taking  ad- 
ditional policies.  The  profits  on  such  policies  (which, 
upon  any  of  the  ordinary  plans,  would  be  enjoyed  by  the 
general  mass  of  the  policy-holders,  and  are  on  this  plan 
given  only  to  those  who  pass  the  period  when  the  divi- 
dends begin)  are,  by  the  power  of  the  tontine  principle, 
augmented  to  such  a  remarkable  extent  that,  while  the 


286  YALE  READINGS  IN  INSURANCE 


taking  of  the  additional  policies  is  wise  in  itself  as  a  new 
security,  the  annuity  ultimately  to  be  derived  from  the 
same  may  most  opportunely  aid  in  the  payment  of  the 
premiums  of  the  policies  already  in  force,  and  thus 
"make  assurance  doubly  sure." 


CHAPTER  XXI 

ECONOMIC  ASPECT  OF  LENGTHENING   HUMAN  LIFE  ' 

CONCERTED  action  by  life  insurance  companies  to 
lengthen  human  life  would  mark,  I  believe,  one  of  the 
greatest  steps,  if  not  the  greatest  step,  ever  yet  taken 
toward  the  improvement  of  human  longevity.  The  nearest 
analogy  is  perhaps  to  be  found  in  the  work  of  fire  insur- 
ance companies  in  reducing  the  number  of  fires.  But  it  is 
a  general  truth  that  the  best  success  of  any  movement  is 
found  only  when,  in  a  sense,  it  reaches  the  commercial 
stage  —  in  other  words,  when  it  is  made  to  pay  in  some 
tangible  way.  Philanthropy  is  keen  to  lead  the  way  to 
reform,  but  becomes  a  broken  reed  if  depended  upon  for 
its  support  continuously  or  on  a  large  scale. 

The  insurance  men  whom  I  have  consulted  as  to  whether 
it  would  pay  to  engage  in  the  saving  of  lives  have  been 
unanimously  affirmative  in  their  answers.  So  obvious 
does  this  seem  that  the  question  arises,  why  have  insur- 
ance companies  never  attempted  it  before?  There  seem 
to  be  three  explanations: 

First,  the  continuance,  until  recently,  of  the  tradition 
that  human  mortality  follows  a  nearly  invariable  law,  and 
a  law  which  cannot  be  appreciably  affected  by  any  act  of 
man. 

Second,  after  it  became  known  to  experts  that  human 
life  is  greatly  extensible  through  public  and  private  hygiene, 
this  knowledge  was  possessed  by  so  few,  that  the  general 

1  By  Irving  Fisher,  Professor  of  Political  Economy  in  Yale  Uni- 
versity, President  of  the  Committee  of  One  Hundred  on  National 
Health.  Reprint  of  a  speech  delivered  before  a  meeting  of  the 
Association  of  Life  Insurance  Presidents. 

287 


288  YALE  READINGS  IN  INSURANCE 

public,  and  even  the  rank  and  file  of  the  medical  profession, 
remained  of  the  contrary  belief,  and  the  inertia  of  their 
conservative  opinion  prevailed. 

Third,  it  seemed  too  large  a  task  for  any  one  company 
to  prolong  life  for  the  whole  country,  and  there  seemed  no 
way  to  prolong  the  lives  of  its  own  policy-holders  alone, 
so  long  as  unsanitary  conditions  prevailed  throughout  the 
communities  in  which  these  policy-holders  lived,  while 
finally  there  seemed  no  way  of  bringing  the  various  life 
insurance  interests  to  agree  on  concerted  action. 

It  seems  now,  however,  that  the  time  has  arrived  when 
all  three  of  these  objections  can  be  removed.  I  assume 
that  before  this  audience  there  is  no  need  of  presenting 
evidence  or  arguments  to  prove  that  human  life  may  be 
lengthened  by  hygienic  measures,  and  shall  therefore 
merely  run  over  very  briefly  the  most  salient  and  general 
facts,  as  introductory  to  the  formulation  of  a  practical 
plan  of  action. 

It  has  long  been  known  that  there  is  no  iron  law  of 
mortality,  but  that  mortality  depends  on  the  hygienic  state 
of  the  community.  Baines,  in  a  recent  paper  in  the  Jour- 
nal of  the  Royal  Statistical  Society,  has  calculated  that 
the  average  duration  of  life  in  India  is  only  twenty-three 
years  for  males  and  twenty-four  years  for  females,  or  less 
than  half  the  life  span  in  the  advanced  countries  of  Europe. 
The  estimates  of  Finkelnburg  show  that  in  Europe  human 
life  has  probably  doubled  in  the  last  350  years.  More 
recent  and  more  reliable  figures  show  that  life  is  lengthen- 
ing to-day  more  rapidly  than  ever.  If  we  take  life  tables 
for  different  periods  for  England,  France,  Prussia,  Denmark, 
Sweden,  and  Massachusetts,  we  find  that  human  life 
lengthened  during  the  seventeenth  and  eighteenth  cen- 
turies at  the  rate  of  four  years  per  century;  that  during 
the  first  three-quarters  of  the  nineteenth  century  it  length- 
ened at  the  rate  of  about  nine  years  per  century;  that  at 
present  it  is  lengthening  in  Europe  generally  at  the  rate 
of  seventeen  years  per  century,  and  in  Prussia  (which  is 


LENGTHENING  HUMAN  LIFE  289 

perhaps  the  home  of  preventive  medicine)  at  the  rate  of 
twenty-seven  years  per  century.  For  this  country  the 
rate  can  only  be  judged  from  the  statistics  for  Massachu- 
setts, which  show  that  life  is  lengthening  by  about  fourteen 
years  per  century,  or  approximately  half  of  the  Prussian 
rate.  These  rates  may  not  continue  in  the  future,  but  the 
opinion  of  our  best  authorities  on  longevity,  such  as  Ray 
Lankester  and  Metchnikoff,  is  that  there  is  still  great  room 
for  improvement,  especially  after  middle  life.  Hitherto 
almost  all  the  improvement  has  applied  to  ages  before 
50,  and  only  the  most  recent  figures  show  any  tendency 
toward  improvement  beyond  that  age.  It  is  significant 
that  backward  India  —  in  spite  of  the  enormous  room  for 
improvement  —  shows  during  twenty  years  no  rate  of 
improvement  whatever. 

The  statistics  of  insured  lives  show  that  the  insured  poor, 
as  represented  by  the  industrial  companies,  have  a  mor- 
tality from  50  to  80  per  cent,  higher  than  the  insured  rich 
or  well-to-do,  as  represented  in  the  ordinary  insurance 
companies.  The  unsanitary  districts  of  Glasgow  and 
Paris  show  a  mortality  more  than  double  that  of  the  sani- 
tary districts,  while  cities  in  general  show  a  much  higher 
mortality  than  the  open  country.  A  fall  of  the  death  rate 
always  promptly  follows  sanitation.  Colonel  Gorgas  cut 
the  death  rate  in  Havana  in  two,  bringing  it  down  to 
between  20  and  24  per  1000.  The  New  York  death  rate 
responded  at  once  to  Colonel  Waring's  clean  streets,  and 
that  of  Rochester  to  Dr.  Goler's  milk  crusade.  And  now 
it  is  announced  that  the  death  rate  of  New  York  is  16.5, 
the  lowest  on  record  —  a  result,  in  all  human  probability, 
due  to  the  hygienic  work  of  Dr.  Darlington,  the  efficient 
health  officer,  Mr.  Nathan  Straus,  the  milk  reformer,  and 
the  public  agitation  for  health  prosecuted  by  the  New 
York  Times,  the  Journal,  and  other  media,  allied  with  the 
health  work  of  the  Committee  of  One  Hundred  on  National 
Health,  the  Tuberculosis  Association  and  Committees,  and 
other  organizations. 


290  YALE  READINGS  IN  INSURANCE 

These  and  other  facts  and  the  mass  of  detailed  figures 
which  they  represent  show  conclusively  that  human  life 
is  long  or  short  precisely  according  to  the  hygienic  condi- 
tions under  which  it  is  lived;  that  human  life  can  be  pro- 
longed as  these  hygienic  conditions  are  improved,  and  that 
there  is  still  enormous  room  for  improvement.  Farr, 
twenty  years  ago,  in  his  masterly  work  on  Vital  Statistics, 
stated  that  any  community  could  attain  an  average  dura- 
tion of  life  equal  to  that  in  the  so-called  "healthy  districts" 
of  England,  where  the  average  duration  of  life  was  then 
fifty-one  years.  To  bring  all  England  up  to  this  level 
would  at  that  time  mean  a  lengthening  of  life  by  one-fifth, 
or  20  per  cent. 

A  report  which  I  have  recently  prepared  for  the  Con- 
servation Commission,  based  on  data  contributed  from 
acknowledged  American  authorities,  shows  that  human 
life  in  America  could,  by  the  adoption  of  hygienic  reforms 
already  known  and  entirely  practicable,  be  lengthened  by 
over  one-third  —  that  is,  over  fifteen  years.  This  cal- 
culation has  been  made  very  conservatively  and  is  prob- 
ably several  years  inside  the  truth.  The  statistics  and 
estimates  on  which  it  is  based  have  been  taken  from  pub- 
lished sources,  as  well  as  contributed  by  some  score  of 
American  authorities  —  medical,  actuarial,  and  hygienic. 

A  safe  minimum  estimate  was  made  of  the  degree  of 
preventability  of  the  deaths  from  each  of  the  ninety  prin- 
cipal causes  of  death  in  the  United  States.  For  instance, 
for  typhoid  fever,  experience  in  Lawrence,  Massachusetts, 
has  shown  that  the  introduction  of  a  public  water  filter 
reduced  the  typhoid  mortality  by  80  per  cent.  In  Munich 
the  cleaning  of  cesspools  and  other  hygienic  measures 
reduced  the  mortality  from  typhoid  by  97  per  cent.  On 
the  basis  of  these  and  other  facts,  it  was  conservatively 
estimated  that  85  per  cent,  of  the  deaths  now  occurring 
from  typhoid  fever  in  the  United  States  could  be  easily 
prevented.  Professor  Sedgwick  recently  announced  the 
truth  of  Hazen's  theorem  —  that  for  each  life  saved  from 


LENGTHENING  HUMAN  LIFE  291 

typhoid,  two  or  three  lives  are  saved  from  other  diseases. 
This  cumulative  effect,  however,  was  not  taken  into 
account  in  the  calculations,  nor  was  account  taken  of  the 
constant  advance  being  made  in  preventive  medicine. 

For  these  and  other  reasons,  the  calculated  estimate 
of  the  improvability  of  human  life  is  regarded  as  ultra- 
conservative.  Tuberculosis  is  known  to  be  preventable. 
In  my  table,  it  is  entered  as  only  75  per  cent,  preventable ; 
pneumonia  as  45  per  cent,  preventable ;  typhoid  as  85  per 
cent. ;  diphtheria,  70  per  cent.  These  conservative  figures 
are  among  the  highest  allowed.  Many  diseases,  such  as 
cancer,  are  recorded  in  the  table  as  zero  per  cent,  prevent- 
able, although  the  best  expert  opinion  would  allow  some 
degree  of  preventability,  if  prevention  begins  early  enough 
in  life. 

On  the  basis  of  these  ratios  of  preventability,  or  rather 
postponability  of  death,  has  been  computed  the  possible 
extension  of  the  average  human  life  by  saving  lives  now 
lost  by  preventable  diseases.  The  calculation  is  made  on 
the  assumption  that  those  thus  saved  from  death  enjoy 
as  their  new  lease  of  life  only  the  expectation  of  life  now 
belonging  to  their  respective  ages.  This  assumption  is 
very  conservative,  for  it  means  that  lives  once  saved  shall 
receive  no  further  benefits  from  improved  mortality,  but 
shall  die  off  at  the  old  rates  of  mortality. 

Even  on  these  safe  premises  of  partial  postponability 
of  deaths,  we  find  that  about  two  years  of  the  possible 
lengthening  of  human  life  would  be  due  to  the  elimination 
of  preventable  tuberculosis;  .6  of  a  year  to  the  elimination 
of  preventable  typhoid ;  .5  to  the  elimination  of  preventable 
diphtheria;  .9  to  the  elimination  of  preventable  accidents. 
It  is  estimated  that  at  least  eight  years  could  be  added  to 
human  life  merely  by  securing  reasonably  pure  air,  water, 
and  milk. 

A  grouping  by  ages  will  bring  home  these  figures  to  life 
insurance  companies.  It  was  estimated  that  for  diseases 
of  infants  under  one  year  of  age,  such  as  broncho-pneu- 


292  YALE  READINGS  IN  INSURANCE 

monia,  diarrhoea,  and  enteritis,  at  least  half  of  the  deaths 
were  preventable  —  that  is,  postponable.  For  diseases  of 
childhood  such  as  meningitis,  diphtheria,  and  scarlet  fever 
the  same  is  true;  for  diseases  of  middle  life,  such  as  typhoid 
fever,  tuberculosis,  pneumonia,  and  accidents,  over  one- 
third  are  postponable;  and  for  diseases  of  late  life,  such  as 
Bright's  disease,  heart  disease,  and  apoplexy,  at  least  one- 
fourth  of  the  deaths  are  postponable. 

These  ratios  may  seem  high  at  first  glance,  but  only 
because  no  one  has  previously  attempted  to  assemble  all 
ratios  of  preventability.  Each  investigator  has  seen 
clearly  the  preventability  within  his  own  special  sphere, 
but  assumed  that  outside  that  sphere  the  preventability 
was  less.  One  specialist  knows  that  tuberculosis  is,  for 
the  most  part,  preventable;  another,  typhoid;  a  third, 
diphtheria;  a  fourth,  infantile  diarrhoea.  And  yet  each 
clings  to  the  idea  that  disease  in  general  is  unpreventable. 
Some  of  the  very  experts  of  the  Yale  Medical  School  and 
state  and  federal  health  officers  who  contributed  the  in- 
dividual estimates  —  and  these  experts  include  eighteen 
of  the  best  and  safest  authorities  in  the  United  States  — 
have  been  surprised  to  find  how  large  in  the  aggregate 
the  resultant  preventability  is.  It  shows  that  over  a  third 
of  all  deaths  which  now  occur  could  be  prevented  —  that 
is  to  say,  deferred.  Every  precaution  has  been  taken  to 
make  these  figures  so  safely  within  the  truth  as  to  avoid 
the  possibility  of  any  reasonable  criticism.  I  will  add  that 
those  who  contributed  the  statistics,  estimates,  and  expert 
guesses  on  which  these  aggregates  are  based  were  espe- 
cially urged  to  be  conservative.  The  eighteen  estimators 
included  Drs.  Flint,  Blumer,  Swain,  and  Osborne  of  the 
Yale  Medical  School;  Dr.  Wilbur,  Chief  of  Vital  Statistics 
of  the  United  States;  Health  Officers  Townsend  of  Con- 
necticut, Baker  of  Michigan,  Wright  of  New  Haven, 
Woodward  of  Washington,  Chapin  of  Providence,  etc. 
These  gentlemen  made  their  estimates  independently,  but 
they  agreed  remarkably  well.  This  would  indicate  that 


LENGTHENING  HUMAN  LIFE  293 

they  were  correct.  These  gentlemen  are  not  given  to 
exaggeration,  but  even  if  their  estimates  are  three  times 
too  great,  the  preventable  deaths  still  exceed  10  per  cent. 

By  working  out  the  ratios  of  preventability  for  each  of 
the  principal  causes  of  death,  it  is  possible  to  construct  an 
ideal  survivorship  table  which  may  then  be  compared  with 
existing  survivorship  tables.  Actuaries'  tables  show  that 
a  reduction  of  one-third  in  mortality  would  enable  the 
premium  to  be  reduced  by  over  15  per  cent.  Even  if 
only  a  third  of  this  possible  reduction  were  obtained,  or  5 
per  cent.,  the  insured  in  the  United  States  would  be  saved 
many  millions  annually.  Of  course  whatever  saving  is 
possible  can  not  be  secured  without  effort  or  cost.  Not 
all  of  it  can  be  obtained  at  once,  and  some  of  it  can  be 
obtained  whether  insurance  companies  take  a  hand  or 
not.  But  by  so  doing  they  can  greatly  accelerate  the 
improvement.  While  it  would  be  manifestly  impossible 
to  estimate  exactly  what  returns  could  be  made  on  the 
investment,  it  is  clear  that  even  if  the  most  meager 
returns  could  be  secured,  the  gain  would  pay. 

It  can  scarcely  be  imagined  that  the  companies  would 
lose  anything.  I  understand  that  $200,000  a  year  is 
about  two  cents  per  $1000  of  insurance  carried.  It  would 
be  strange  if  $200,000  could  not  be  expended  in  such  a 
manner  as  to  secure  a  saving  of  a  postage  stamp  a  year 
on  each  $1000  policy!  As  one  of  your  actuaries,  Mr. 
Messenger,  has  shown,  $200,000  is  only  one-eighth  of  1 
per  cent,  of  present  annual  death  claims. 

The  chance  of  failure  is  further  reduced  when  we  remem- 
ber that  the  effect  in  reducing  mortality  is  progressive  or 
cumulative,  while  no  cumulative  effect  is  needed  to  return 
the  money  invested. 

The  conclusion  seems  safe  that  here  is  a  rich  unexploited 
field  for  saving  money.  And  the  beauty  of  it  is  that  these 
gains  bring  with  them  gains  far  more  precious  to  the  nation 
than  dollars  —  immeasurable  gains  of  longevity,  vitality, 
efficiency,  and  happiness.  Life  insurance  is  not  philan- 


294  YALE  READINGS  IN  INSURANCE 

thropy,  but  it  is  a  beneficent  business.  Though  at  first 
glance  it  might  seem  that  to  prevent  the  pollution  of 
streams,  to  improve  the  milk  supply,  to  obtain  pure  foods, 
and  freedom  from  accident  is  no  part  of  the  business  of 
life  insurance,  yet  it  is  easy  enough  to  see  the  very  vital 
connection.  By  far  the  larger  part  of  the  cost  of  the 
insurance  business  is  not  management  nor  agents'  fees  but 
cost  of  mortality.  It  is  the  right,  if  in  fact  it  is  not  the 
duty,  of  any  business  to  reduce  its  cost.  To  pare  down 
salaries  might  not  save  the  policy-holder  1  per  cent,  of  his 
premium,  but  to  reduce  mortality  cost  might  save  him 
many  per  cent. 

Another  point  may  be  emphasized.  The  mere  announce- 
ment that  insurance  companies  intended  to  improve 
health  conditions  would  have  an  effect  in  improving  those 
conditions.  This  effect  would  be  felt  in  two  ways:  First, 
it  would  convince  millions  of  the  ignorant  and  indifferent 
that  the  public  health  movement  must  have  substantial 
merit  to  be  an  object  of  interest  by  life  insurance  com- 
panies. People  are  easily  led  by  those  whose  opinions 
they  respect.  In  spite  of  the  great  progress  of  the  health 
movement,  there  are  still  vast  hordes  of  our  people  who 
know  nothing  of  it.  Knowledge  of  its  merits  is  largely 
confined  to  scientific  and  medical  men,  who  constitute 
only  a  small  fraction  of  the  population.  The  actuaries 
and  medical  boards  and  other  insurance  officials  constitute 
a  still  smaller  class.  Yet  these  classes  can  easily  sway  the 
whole.  The  second  way  in  which  the  mere  announcement 
of  your  purpose  to  labor  for  health  would  have  immediate 
effect  is  in  spurring  numerous  officials  and  firms  to  reform. 
Every  health  officer,  every  food  manufacturer,  every  milk 
dealer  in  the  United  States  that  heard  of  the  intention 
of  the  insurance  companies  to  improve  health  conditions 
would  become  ambitious  to  make  a  good  showing.  Local 
pride  in  every  community  would  result  in  efforts  to  keep 
abreast  of  the  best  records  and  avoid  the  reputation  for 
being  an  unhealthful  place  in  which  to  live.  Insurance  com- 


LENGTHENING  HUMAN  LIFE  295 

panics  sometimes  charge,  I  believe,  higher  rates  for  policies 
involving  tropical  residence,  but  in  the  United  States  are 
not  allowed  to  make  local  discrimination.  There  is,  there- 
fore, all  the  more  reason  why  they  might  properly  endeavor 
to  lower  the  mortality  in  say  Mississippi  —  if  the  mor- 
tality is  high  there  —  in  order  that  they  might  be  enabled 
to  do  business  there. 

In  the  history  of  fire  insurance,  the  mutual  companies 
first  made  the  effort  to  reduce  fire  risks.  When  the  im- 
portance of  exercising  the  function  of  preventing  fires,  as 
well  as  indemnifying  against  fires,  once  entered  into  the 
plans  of  stock  companies,  they  soon  overtook,  if  they  did 
not  outrun,  the  mutual  companies  in  the  success  of  their 
efforts.  It  is  estimated  that  the  risk  from  fire  in  certain 
particular  classes  has  been  reduced,  through  the  fire  insur- 
ance companies,  some  70  per  cent.  In  New  England 
seventy  years  ago  the  rate  on  cotton  and  woolen  mills 
averaged  three  or  four  dollars  per  hundred.  To-day  these 
mills  are  being  insured  at  a  total  cost  per  annum  of  seven 
cents  per  hundred.  In  some  cases  the  cost  has  been 
reduced  to  1-100  of  the  former  amount.  This  enormous 
decrease  has  been  accomplished  by  slight  expenditures.  In 
some  factories  the  cost  of  improvements  has  been  more 
than  paid  for  in  the  saving  of  premiums  for  fire  insurance 
in  one  year.  The  stock  companies  were  forced  by  the 
competition  of  the  mutual  companies  to  take  up  preventive 
measures.  They  now  employ  fire  insurance  engineers  to 
maintain  a  laboratory  in  Chicago  which  is  well  equipped 
for  the  purpose  of  studying  fire-resisting  materials,  fire- 
resisting  devices,  new  apparatus,  and  fire  prevention  in 
general.  Many  fire  insurance  men  believe  that  this 
laboratory  is  their  best  investment.  No  reduction  in  rate 
is  guaranteed  until  fire-fighting  devices  are  approved  by 
the  laboratory.  Now  that  the  stock  companies  have  gone 
into  this  work  of  fire  prevention  systematically,  they  are 
regaining  the  ground  that  they  lost  by  allowing  the  mutuals 
to  get  ahead  of  them. 


296  YALE  READINGS  IN  INSURANCE 

In  employers'  liability  insurance,  the  idea  of  prevention 
has  made  great  headway.  Here  the  companies  are  all 
stock  companies,  but  they  have  learned  that  their  function 
is  not  simply  to  distribute  losses,  but  to  lessen  them  as  well. 
So  also  accident  companies  have  aided  in  passing  laws 
which  tend  to  prevent  accidents  to  life  and  limb.  Here 
they  have  reached  the  very  threshold  of  public  health. 
It  is  manifest  destiny  that  if  insurance  companies  now  aid 
in  legislation  to  save  the  arms  and  legs  of  workmen,  they 
will  soon  aid  in  legislation  also  to  save  lives.  In  fact, 
protection  from  accidental  injury  is  also  protection  from 
accidental  death;  and  if  you  strive  to  reduce  the  deaths 
from  accident,  why  not  reduce  the  deaths  from  other 
causes?  If  casualty  companies  work  for  improved  safety, 
why  should  not  life  companies  work  for  improved  sani- 
tation and  improved  hygiene  in  general?  In  fact,  the 
Industrial  Department  of  the  Metropolitan  Company  has 
just  announced  that  if  prevention  of  tuberculosis  and 
reduction  of  the  death  rate  will  give  cheaper  insurance,  the 
company  hopes  to  cooperate  with  existing  agencies  for 
the  eradication  of  this  and  other  diseases,  and  to  place  at 
their  disposal  its  machinery  and  the  statistical  material 
which  it  has  gathered  since  its  organization. 

According  to  the  plans  which  I  have  in  mind,  the  money 
to  be  invested  in  life-saving  would  be  largely  in  the  educa- 
tion of  the  public  and  especially  policy-holders  in  health 
matters,  and  cooperation  in  every  legitimate  way  to 
improve  the  public  health  offices  and  service  in  the 
municipalities,  states,  and  the  federal  government.  In 
this  latter  way,  the  result  of  the  expenditure  of  money  by 
the  insurance  companies  would  be  to  induce  the  govern- 
ment to  spend  much  larger  sums,  and  the  money  invested 
by  the  insurance  companies  would  be  multiplied  in  effi- 
ciency several  fold.  If,  for  instance,  by  the  expenditure 
of  $200,000  a  year  the  public  throughout  the  country 
could  be  made  to  appreciate  the  importance  of  clean 
streets,  pure  water  supply,  etc.,  sufficiently  to  result  in 


LENGTHENING  HUMAN  LIFE  297 

municipal  expenditure  by  the  cities  of  the  United  States 
for  public  health  of  an  additional  $20,000,000  which  would 
otherwise  not  have  been  made,  every  dollar  invested  would 
be  multiplied  a  hundred-fold.  In  other  words,  the  insured 
lives  would  not  have  to  carry  the  entire  load,  but  could 
induce  the  tax-payer  to  do  his  share.  Our  public  health 
laws  and  administration  leave  vast  room  for  improvement. 
As  Dr.  Welch  has  said,  neglect  of  public  health  is  a  dis- 
grace to  the  nation.  Some  states  have  no  boards  of  health. 
Few  have  good  ones.  A  minority  have  accurate  registra- 
tion of  deaths  and  not  one  has  accurate  registration  of 
births.  We  therefore  lack  even  the  first  step  toward 
efficient  national  health  protection  —  good  vital  statistics. 

Just  as  fire  insurance  companies  endeavor  to  secure  in 
municipalities  adequate  fire  protection,  so  life  insurance 
companies  might  properly  endeavor  to  secure  adequate 
municipal  health  protection,  and  they  might  likewise 
bring  their  influence  to  bear  in  securing  the  passage  of 
model  health  laws  by  our  states  in  respect  to  slaughter 
houses,  pure  food,  and  other  health  reforms.  The  present 
great  and  needless  waste  of  human  life  brings  its  heavy 
financial  weight  largely  on  insurance  companies.  The 
Prudential  Company  pays  out  annually  $800,000  for 
death  claims  on  account  of  tuberculosis  alone,  a  disease 
which  is  known  to  be  preventable. 

As  to  a  practical  plan  for  participation  by  the  life  in- 
surance companies  in  the  health  movement,  two  methods 
suggest  themselves.  The  first  is  for  the  life  insurance  com- 
panies, in  combination,  to  establish  their  own  machinery 
for  disbursing  funds  intended  to  improve  the  public 
health.  The  second  is  to  contribute  to  one  or  more 
organizations  already  existing  for  this  purpose.  I  shall 
speak  in  favor  of  the  second,  and  in  particular  of  the 
advantages  to  be  obtained  by  using  the  Committee  of  One 
Hundred  on  National  Health,  of  which  I  am  president, 
as  the  agent  for  this  distribution.  I  will  say  at  the  outset, 
however,  that  I  think  our  committee  would  be  willing,  if 


298  YALE  READINGS  IN  INSURANCE 

need  be,  to  stand  aside  in  favor  of  any  plan  which  the 
insurance  companies  should  prefer.  We  have  been  inter- 
ested in  this  work  from  a  philanthropic  point  of  view 
only,  and  have  borne  its  burden  because  no  other  organiza- 
tion was  doing  the  work.  It  has  been  a  tax  on  our  time 
and  purses,  and  we  should,  if  the  same  work  could  be  done 
by  others  without  this  tax,  be  only  too  ready  to  hand  it 
over.  We  believe,  however,  that  there  would  be  a  distinct 
advantage  to  the  insurance  companies  in  utilizing  our 
agency,  instead  of  creating  a  new  one.  Since  the  work  is 
largely  one  of  educating  and  convincing  public  opinion,  it 
seems  an  advantage  that  the  movement  should  have  a 
scientific  as  well  as  a  commercial  flavor.  Our  committee 
was  appointed  by  the  American  Association  for  the 
Advancement  of  Science,  and  consists,  for  the  most  part, 
of  men  of  national  reputation. 

As  to  the  methods  of  expending  the  proposed  fund  to 
be  created  by  the  insurance  companies,  details  can  be  sub- 
mitted to  the  committee  appointed  to  consider  them. 
This  would  include  the  enlargement  of  our  magazine,  the 
pressing  of  health  bills  before  Congress  and  the  legislatures 
of  the  several  states,  the  publication  and  distribution  of 
leaflets  of  information  in  continuation  of  the  series  of 
twenty-six  which  we  have  already  published,  a  campaign 
of  newspaper  publicity  and  education,  especially  through 
plate  matter  prepared  and  given  to  10,000  country  news- 
papers. It  would  also  include  efforts  to  enlarge  the  Ameri- 
can Health  League  so  that  it  may  fulfil  two  functions: 
first,  create  an  interest  in  a  large  number  of  people  in 
healthful  individual  living,  and,  second,  create  and  for- 
mulate public  opinion  which  shall  secure  public  health 
legislation. 


CHAPTER  XXII 

CONTROL  OF  LIFE   INSURANCE   COMPANIES  l 

FROM  the  standpoint  of  control,  there  are  three  classes 
of  life  insurance  companies:  stock  companies,  mixed  com- 
panies, and  mutual  companies.  The  stock  companies  were 
the  first  in  the  field,  writing  a  small  amount  of  purely  non- 
participating  business.  About  1840,  companies  began  to 
be  organized  on  a  mutual  basis,  and  these  soon  drove  the 
three  old  stock  companies  out  of  the  life  insurance  field. 
In  the  twenty  years  following  1840,  practically  all  the 
prominent  mutual  companies  of  to-day  were  organized. 
Following  the  organization  of  these  successful  mutual  com- 
panies came  the  formation  of  a  large  number  of  stock  and 
mixed  companies,  as  a  result  partly  of  the  desire  on  the 
part  of  capitalists  to  engage  in  an  apparently  profitable 
business,  and  partly  of  the  enactment  of  state  laws,  which 
from  that  day  to  this  have  made  the  formation  of  a  mutual 
company  difficult. 

Control  of  stock  companies  is,  of  course,  lodged  in  the 
hands  of  stockholders,  and  problems  connected  with  their 
management  would  be  no  more  serious  than  those  arising 
in  the  management  of  any  joint  stock  company,  if  it  were 
not  for  two  conditions.  In  the  first  place,  these  com- 
panies are  permitted  to  write  participating  as  well  as  non- 
participating  policies;  that  is,  they  are  allowed  to  solicit 
business  on  promise  of  a  division  of  profits  among  pur- 
chasers of  their  product.  This  differentiates  a  stock  life 

1  By  Lester  W.  Zartman,  Assistant  Professor  of  Political  Economy 
in  Yale  University.  Reprinted  from  pages  531-541,  Volume  XV, 
Journal  of  Political  Economy. 

299 


300  YALE  READINGS  IN  INSURANCE 

insurance  company  from  any  other  joint  stock  concern. 
Although  some  of  the  leading  stock  companies  may  have 
paid  nearly  as  large  dividends  to  their  participating  policy- 
holders  as  have  been  paid  by  mutual  companies,  it  is  still 
true  that  the  privilege  granted  these  companies  is  of  doubt- 
ful advantage  to  the  best  interests  of  the  business.  If  the 
dividends  upon  the  capital  stock  are  limited  in  amount, 
there  is  no  added  incentive  to  the  officials  through  the 
existence  of  the  capital  stock  to  manage  the  company  well, 
and  the  capital  stock  remains  as  a  dangerous  weapon  by 
means  of  which  men  can  obtain  control  of  the  company. 
If  the  dividends  are  not  limited  in  amount,  there  is  the 
possibility  that  the  participating  policy-holders  will  be 
mulcted  to  the  advantage  of  the  stockholders.  If,  as  in 
the  case  of  some  companies,  the  dividends  beyond  a  cer- 
tain amount  which  the  company  can  pay  upon  the  capital 
stock  are  limited  to  the  profits  made  from  the  non-partici- 
pating policy-holders,  the  division  of  the  fixed  charges  of 
the  company  can  be  so  arranged  as  not  to  do  substantial 
justice  to  the  participating  policy-holders.  For  these 
reasons  the  state  is  justified,  if  not  in  prohibiting  stock 
life  insurance  companies  from  writing  participating  policies, 
at  least  in  exercising  much  more  control  over  their  affairs 
than  is  exercised  over  other  corporations. 

The  second  peculiarity  differentiating  stock  life  insur- 
ance companies  from  other  corporations  is  that  the  stock- 
holders of  the  life  company  soon  come  into  nearly  absolute 
control  of  much  larger  assets  than  the  capital  originally 
invested.  To  be  sure,  this  is  true  in  a  way  also  of  banks 
and  other  fiduciary  institutions,  but  the  insurance  company 
differs  radically  from  a  bank  in  that  its  reserves,  unlike 
deposits,  cannot  be  withdrawn  at  the  will  of  those  to  whom 
they  belong.  No  matter  how  inefficient  the  management 
of  a  stock  company,  there  may  be  no  weeding  out  of 
incompetent  men.  The  policy-holders,  who  are  the  most 
interested,  have  no  redress.  They  cannot  withdraw  their 
savings,  thus  showing  their  disapproval  of  the  manage- 


CONTROL  OF  LIFE  INSURANCE  COMPANIES     301 

ment,  without  a  considerable  financial  sacrifice.  They 
cannot  change  the  management.  The  men  in  control  own 
the  capital  stock,  and  to  displace  them  it  is  necessary  that 
a  controlling  interest  in  the  capital  be  purchased.  Not 
always  have  owners  of  a  majority  interest  been  willing 
to  sell;  only  an  aroused  public  opinion  has  forced  them  to 
part  with  the  control  of  a  company. 

Furthermore,  stock-life  insurance  companies  are  at  the 
mercy  of  designing  financiers  who  may  seek  to  control 
them.  All  the  stock  companies  are  subject  to  this  danger, 
and  many  have  suffered  already.  The  American  Life  of 
Philadelphia  was  wrecked  in  two  years  by  men  who  sur- 
reptitiously purchased  a  controlling  interest.1  These  men 
never  had  any  intention  in  purchasing  the  stock  other  than 
to  possess  themselves  as  quickly  as  possible  of  the  Ameri- 
can's valuable  assets.  A  similar  disaster  to  the  Phoenix 
Life  of  Hartford,  which  at  one  time  had  a  guarantee  capital, 
was  averted  only  by  a  special  session  of  the  Connecticut 
legislature,  which  passed  an  act  changing  the  Phoenix 
into  a  purely  mutual  company.2  The  Equitable  and  the 
Washington  of  New  York  are  at  the  present  time  under  the 
domination  of  one  man.  The  Prudential  of  New  Jersey  is 
controlled  absolutely  by  a  small  group  of  men  who,  in 
1902,  tried  to  avoid  the  necessity  of  keeping  even  six  million 
dollars  invested  as  a  controlling  interest  in  Prudential  stock. 
The  scheme  for  effecting  this  release  was  as  follows:  The 
Prudential  Insurance  Company  was  to  purchase  a  con- 
trolling interest  in  the  Fidelity  Trust  Company,  and  a  con- 
tract was  entered  into  between  the  Fidelity  and  the  majority 
interest  of  the  Prudential  stockholders,  in  which  the  latter 
contracted  to  seil  their  holdings  of  Prudential  stock  to  the 
trust  company.3  In  this  way  the  directors  of  the  Prudential 
could  have  perpetuated  their  control  without  any  financial 

1  The  Insurance  Spectator,  1890,  p.  305,  and  the  Pennsylvania  Life 
Insurance  Report  for  1889. 

2  P.  Henry  Woodward,  "  History  of  Insurance  in  Connecticut,  "  p.  97. 

3  Massachusetts  Life  Insurance  Report,  1902.     Preface. 


302  YALE  READINGS  IN  INSURANCE 

outlay  whatever.  The  plan  was  defeated  by  an  appeal  to 
the  courts,  brought  by  the  Massachusetts  Insurance  Com- 
missioners,1 but  President  Dryden  has  since  announced  that 
the  "good"  results  of  such  a  merger  have  been  secured  in 
an  unobjectionable  manner.2  A  New  Jersey  investment 
company  controls  the  Bankers'  Life  of  New  York,3  while 
a  few  years  ago  a  coterie  of  New  York  financiers  purchased 
a  controlling  interest  in  the  United  States  Life  of  that  city. 
It  is  not  asserted  that  all  the  companies  which  have  here 
been  enumerated  have  suffered  through  the  control  exer- 
cised by  the  capital  stock;  on  the  contrary,  some  of  them 
have  been  most  excellently  managed  by  stockholders. 
Some,  however,  have  already  suffered  seriously,  and  it  is 
believed  that  all  in  which  the  control  is  lodged  exclusively 
in  a  few  hands  are  in  a  precarious  position.  The  assets 
which  the  stockholders  control  really  belong  to  the  policy- 
holders,  and  yet  the  policy-holders  cannot  withdraw  that 
which  belongs  to  them,  since  they  have  entered  into  long- 
time contracts. 

Certainly  the  problems  connected  with  management  of 
stock  life  insurance  companies  are  serious;  so  serious,  in- 
deed, that  it  is  urged  in  many  quarters  that  the  state  should 
not  allow  such  companies  to  be  organized.  All  insurance 
is  essentially  mutual  in  principle;  the  mutual  system 
has  demonstrated  its  fitness  in  dealing  with  life  contin- 
gencies, and  if  the  states  would  amend  their  laws,  capital 
stock  would  be  unnecessary  in  starting  a  life  insurance 
company;4  legislatures  might  not  be  entirely  unjustified 
in  prohibiting  the  formation  of  stock  life  companies. 

I  The  Insurance  Spectator,  1902,  p.  223. 

II  Massachusetts  Insurance  Report,  1903,  p.  xxxix. 

3  The  Insurance  Age,  1904. 

4  Nearly  all  states  insist  upon  a  system  of  net  valuation  of  policies. 
Under  such  a  system  it  is  practically  impossible  to  start  a  new  life 
insurance  company,  unless  capitalists  stand  ready  to  make  up  defi- 
ciencies during  the  early  years.     In  other  ways,  state  laws  have  been 
so  framed  as  seriously  to  discourage  the  formation  of  any  but  stock 
companies. 


CONTROL  OF  LIFE  INSURANCE  COMPANIES      303 

As  regards  control,  a  company  which  is  mixed  —  that 
is  to  say,  a  company  which  has  capital  stock  but  which 
allows  policy-holders  to  vote  —  possesses  no  considerable 
advantage  over  a  purely  stock  company.  The  restrictions 
placed  upon  the  policy-holders'  voting  powers  are  such  in 
most  cases  that  the  concession  has  little  practical  value. 
For  instance,  the  Michigan  Mutual  is  a  mixed  company 
with  $500,000  of  capital  stock.  Each  share  of  stock  has 
a  vote.  In  addition,  policy-holders  insured  for  life  for 
$5000  in  amount  may  vote  in  person  only.1  The  manage- 
ment can  rest  assured  that  5000  persons  carrying  $5000 
policies  of  a  particular  kind  will  never  present  themselves 
in  Detroit  to  cast  their  ballots  in  person.  In  the  Metro- 
politan of  New  York  there  are  40,000  shares  of  stock. 
Policy-holders  paying  $100  premium  per  annum  may  vote, 
but  two-thirds  of  the  directors  must  be  stockholders,  so 
that  the  privilege  granted  to  the  policy-holders  is  worth- 
less.2 The  Manhattan  has  a  thousand  shares  of  stock,  each 
share  entitling  its  owner  to  one  vote.  Policy-holders  pay- 
ing an  annual  premium  of  $75  on  a  life  policy  may  vote, 
but  half  of  the  directors  must  be  stockholders.3  Half  of 
the  board  with  the  president  is  all  that  is  needed  for  con- 
trol, even  if  the  policy-holders  should  elect  all  the  directors 
to  which  they  are  entitled.  The  Home  is  likewise  a  mixed 
company.  Policy-holders  paying  $80  annual  premium  may 
vote.4  The  testimony  before  the  Armstrong  committee 
showed  that  the  Home  has  never  been  troubled  with  policy- 
holders  voting;  in  the  forty-seven  years  of  its  existence, 
only  one  policy-holder  has  appeared  to  cast  his  ballot.5 
It  does  not  appear  that  mismanagement  has  been  so  com- 
mon in  the  history  of  mixed  companies  as  in  the  case  of 
stock  companies,  and  this  is  due,  perhaps,  to  the  latent 

1  Article  IV  of  Constitution. 

z  New  York  Laws  of  1868,  Chap.  XL VIII,  §§  6  and  11. 

3  Charter,  §§  5,  8,  and  9. 

4  Charter,  Art.  V. 

8  Testimony  of  George  E.  Ide,  Armstrong  Report,  p.  3587. 


304  YALE  READINGS  IN  INSURANCE 

possibility  that  policy-holders  will  assert  their  rights; 
nevertheless  a  mixed  company  would  seem  to  be,  for  all 
practical  purposes,  a  stock  company,  and  as  regards  con- 
trol it  presents  most  of  the  problems  and  dangers  inherent 
hi  a  stock  company. 

Nor  is  the  question  of  management  and  control  solved 
when  companies  are  made  mutual  in  their  organization. 
The  system  of  mutual  life  insurance  contemplates  a  manage- 
ment elected  by  the  policy-holders  and  responsible  to  them. 
This  theory  of  government  has,  however,  never  been  worked 
out  in  practice  in  the  United  States  according  to  the  spirit 
of  its  constitution.  The  long  distances  and  the  expenses 
of  traveling  have  made  it  impossible  from  the  beginning 
for  policy-holders  to  cast  their  ballots  in  person.  Resort 
has  been  made  to  proxy  voting,  and  the  result  of  proxy 
voting,  as  allowed  by  most  of  the  states,  has  been  to  make 
the  management  of  mutual  companies  as  certain  of  tenure, 
and  hence  as  careless  of  the  rights  of  policy-holders,  as  have 
been  the  managements  of  stock  companies.  State  laws 
have  placed  few  restrictions  on  the  collection  and  voting 
of  proxies.  In  some  instances  policy-holders  have  even 
signed  a  proxy  when  making  application  for  a  policy;  in 
many  instances  they  have  given  their  rights  to  the  officials 
for  long  periods.  A  part  of  the  agents'  work  each  year 
has  been  to  gather  proxy  votes,  and  send  them  in  to  the 
home  office,  so  that  the  management  should  have  at  all 
tunes  a  sufficient  number  of  proxy  votes  to  defeat  any 
movement  of  opposition  on  the  part  of  dissatisfied  policy- 
holders.  The  companies  have  always  gone  about  the 
gathering  of  proxies  quietly,  for  they  have  not  cared  to 
remind  members  of  their  rights,  yet  they  have  succeeded 
in  keeping  a  large  number  always  on  hand. 

Whoever  in  the  company  controls  the  proxies,  controls 
the  company.  In  1870  there  was  an  internal  conflict  hi 
the  Mutual  Life.  On  the  day  of  the  election  a  consider- 
able number  of  policy-holders  appeared  in  person  to  vote. 
President  Winston  of  the  company  controlled  ten  thousand 


CONTROL  OF  LIFE  INSURANCE  COMPANIES      305 

proxies.  In  the  afternoon,  with  the  outcome  of  the  elec- 
tion in  doubt,  Winston  appeared  with  several  thousand  of 
the  proxy  votes,  cast  them  in  favor  of  himself,  and  the 
day  was  won.1  The  same  thing  has  happened  often  enough 
to  show  the  policy-holders  the  futility  of  opposition.  Policy- 
holders  have  come  to  take  no  interest  in  the  active  manage- 
ment of  companies,  and  certain  officials  have  stayed  in 
power  so  long  that  they  have  come  to  look  upon  their 
company  as  a  personal  asset,  the  sense  of  private  property 
becoming  so  strong  in  some  cases  that  they  have  felt  that 
control  of  a  company  ought  to  be  inherited.2 

Officers  of  all  the  companies  are  practically  unanimous 
in  declaring  that  the  present  system  of  voting  in  mutual 
companies,  or  rather  what  was  the  system  a  year  and  a 
half  ago,  should  not  be  changed.  That  section  of  the  Arm- 
strong law  which  changed  the  method  of  voting  in  mutual 
companies  was  vigorously  opposed  by  the  New  York 
companies,  and  during  the  past  winter  similar  legislation 
in  other  states  has  met  the  opposition  of  the  mutual  com- 
panies in  those  states.  Many  of  the  officials  recognize  that 
the  old  system  is  far  from  ideal,  but  they  believe  that  the 
proposed  reforms  will  lead  to  worse  conditions  in  making 
an  annual  contest  for  the  control  of  the  companies  a  prob- 
able event.  They  hold  that  any  changes  in  the  laws  cal- 
culated to  make  such  yearly  contests  for  control  inevitable 
will  do  more  harm  to  the  insurance  business  than  the  pres- 
ent system  has  done.  They  urge  that  it  is  not  fair  to  sub- 
ject a  company,  which  has  been  brought  to  a  successful 
stage  of  its  existence  through  efforts  of  its  officers,  to  annual 
contests  for  control.  Such  contests,  it  is  believed,  will 
surely  follow  the  adoption  of  the  proposed  reform  methods 
of  voting.  They  point  out  that  men  are  always  willing 
to  listen  to  evil  reports  regarding  anybody  in  power;  and 

1  President  Winston's  circular  letter  of  April  16,  1877,  to  the  policy- 
holders  of  the  Mutual  Life.     See  also,  Julius  Wilcox,  Scribner's  Mag- 
azine, Volume  XIV,  pp.  382,  383. 

2  Wisconsin  Life  Insurance  Report,  1903,  Preface. 


306  YALE  READINGS  IN  INSURANCE 

that  the  greater  the  ease  with  which  a  change  in  adminis- 
tration can  be  secured,  the  greater  the  chance  of  success 
for  selfish  and  unjust  methods  which  will  be  used  for  secur- 
ing a  change.  As  a  final  objection,  they  maintain  that 
the  expense  attendant  upon  an  annual  repetition  of  such 
a  demonstration  as  has  been  witnessed  in  New  York  during 
the  year  past  is  a  greater  strain  on  a  company  than  is  a 
good  sized  "graft";  while  the  annual  throwing  of  mud 
and  the  staining  of  a  company's  reputation,  with  the  con- 
sequent loss  of  policy-holders  and  trouble  in  getting  new 
members,  entail  far  greater  expense  and  loss  than  any 
sort  of  extravagance.  On  these  grounds,  the  officers  oppose 
the  [changes  in  insurance  laws  revising  methods  of  electing 
trustees. 

If  such  conditions  as  indicated  would  result  from  any 
method  enabling  policy-holders  easily  to  express  their 
desires,  then  we  should  unite  with  the  companies  in  oppos- 
ing the  new  laws.  However,  it  seems  that  the  officials 
of  the  various  mutual  companies  have  become  unduly 
alarmed.  With  complete  power  in  the  hands  of  the  policy- 
holders  and  an  easy  method  of  voting  devised,  it  is  not  at 
all  probable  that  there  would  be  an  annual  contest  for 
control.  A  management  which  is  capable  and  conscientious 
may  be  sure  that  policy-holders  will  have  sense  enough  to 
keep  it  in  power.  Crafty  financiers  may  seek  to  get  a 
board  of  trustees  elected  of  their  liking,  but  they  will  soon 
learn  the  folly  of  going  to  the  heavy  expense  of  a  campaign 
to  oust  an  efficient  management.  It  is  almost  safe  to  say 
that  it  will  be  many  years  before  we  shall  witness  another 
campaign  like  that  carried  on  during  the  past  year  for  con- 
trol of  the  two  large  New  York  companies. 

Some  of  the  officials  have  expressed  the  fear  that 
in  a  campaign  for  control  of  a  mutual  company,  policy- 
holders  will  not  know  what  is  to  their  advantage.  They, 
therefore,  are  afraid  to  trust  the  issues  to  them.  Such 
statements  remind  one  of  the  arguments  in  favor  of  an 
autocratic  form  of  government.  An  autocratic  form  of 


CONTROL  OF  LIFE  INSURANCE  COMPANIES     307 

government  is  good  if  the  autocrat  is  wise  and  beneficent. 
But  since  autocrats  in  the  past  have  not  always  been  wise 
and  beneficent,  a  government  responsible  to  the  people 
has  worked  better.  So  it  will  be  in  life  insurance  cor- 
porations. Policy-holders  are  the  company,  its  gain  is 
their  gain,  its  injury  is  their  injury,  and  they  will  soon,  if 
not  immediately,  begin  to  examine  closely  the  men  who 
are  seeking  their  votes  to  oust  an  existing  management. 

Besides  the  natural  conservatism  of  investors  which  will 
work  in  favor  of  the  management  in  power,  there  is  still 
another  advantage  which  the  officials  possess.  It  will 
practically  always  happen  that  the  agency  force  will  work 
in  favor  of  the  administration  party,  and  with  the  agency 
force  so  disposed,  the  men  in  power  will  have  such  an  ad- 
vantage in  a  campaign  that  even  better  men  will  have  a 
hard  task  in  defeating  an  administration  ticket.  This  is 
as  it  should  be.  The  end  that  is  desired  by  those  who  see 
the  evil  of  the  old  system  is  not  an  annual  scramble  for 
control  of  the  companies,  but  such  an  easy  method  of 
removal  that  the  officers  will  at  all  times  be  forced  to  keep 
in  mind  their  responsibility  to  policy-holders. 

A  more  fruitful  question  for  discussion  to  the  man  who 
desires  a  change  from  the  old  system  is  whether  an  easy 
and  effective  method  of  voting  in  mutual  companies  can 
be  devised.  New  York  has  made  a  serious  attempt  to 
put  the  policy-holders  in  control.  In  the  revision  of  the 
insurance  laws  of  the  state,  in  1906,  it  was  provided  that 
two  lists  of  policy-holders'  names  and  addresses  should  be 
filed  by  each  mutual  company  with  the  Superintendent 
of  Insurance  at  Albany,  and  two  similar  lists  with  the 
general  agents  in  each  state  and  foreign  country  in  which 
business  is  transacted;  that  the  tickets  be  nominated  by 
the  administration  five  months  prior  to  the  election,  and 
by  an  opposition  party  at  least  three  months  before  the 
election;  and  that  policy-holders  should  be  allowed  to  vote 
in  person,  by  mail,  or  by  proxy. 

One  election  has  already  taken  place  under  the  New 


308  YALE  READINGS  IN  INSURANCE 

York  law.  Some  criticism  may  be  offered  of  the  method 
adopted.  In  the  first  place,  the  companies  are  bitterly 
opposed  to  that  section  of  the  law  which  provides  for  public 
listing  of  the  names  and  addresses  of  policy-holders.  The 
New  York  companies  would  rather  have  this  provision 
repealed  than  any  other  of  the  so-called  Armstrong  laws. 
Officers  of  mutual  companies  in  other  states  will  make  no 
compromise  on  this  subject.  The  contention  of  the  com- 
panies in  this  respect  is  well  grounded.  Such  a  public 
posting  of  names  does  a  serious  amount  of  damage  to  the 
companies  compelled  to  obey  the  law.  Agents  of  rival 
companies  prize  a  list  of  policy-holders  in  another  company 
very  highly,  not  only  for  the  purpose  of  twisting  the  policy- 
holders  into  their  own  companies,  but  also  because  the  best 
purchasers  of  insurance  are  those  who  already  have  policies. 
For  this  reason,  the  companies  regard  this  provision  of  the 
law  as  a  violation  of  their  rights  not  to  be  condoned. 

Yet  such  a  measure,  or  some  substitute  for  the  measure, 
is  absolutely  necessary  if  there  is  to  be  any  appreciable 
opposition  to  the  administration  party.  In  the  past  when 
there  has  been  among  policy-holders  wide-spread  dissatis- 
faction with  a  management,  opposition  has  been  ineffectual 
because  it  never  could  be  united.  If  such  opposition  is 
ever  to  accomplish  its  ends,  it  must  be  concentrated,  and 
no  sort  of  cooperation  is  possible  unless  the  policy-holders 
have  some  means  of  communicating  with  each  other.  So 
long  as  the  administration  alone  possesses  a  list  of  the 
voters  with  their  addresses,  it  has  an  advantage  which  a 
scattered  opposition  cannot  overcome.  All  that  is  left 
to  the  opposition  under  these  circumstances  is  commu- 
nication by  means  of  advertisements  in  the  papers,  an 
expensive  method,  as  well  as  one  of  doubtful  utility. 
Therefore,  unless  some  method  is  devised  of  allowing  the 
opposition  to  communicate  freely  with  voters,  the  system  of 
control  by  policy-holders  fails.  However,  it  is  not  neces- 
sary that  the  list  of  names  should  be  open  to  public  inspec- 
tion. It  might  be  practicable  to  have  all  the  literature 


CONTROL  OF  LIFE  INSURANCE  COMPANIES      309 

which  any  opposition  ticket  may  wish  to  send  out  addressed 
by  the  state  at  the  expense  of  the  opposition,  or  even  sent 
out  by  the  administration  under  the  supervision  of  the 
state,  but  still  at  the  expense  of  the  opposition.  Company 
officials  do  not  take  kindly  to  either  suggestion,  holding 
that  the  opposition  has  no  right  to  this  advantage  of  inter- 
communication. In  doing  so,  they  are  carrying  their 
opposition  too  far.  The  officials  have  no  inherent  right 
to  hold  their  positions  irrespective  of  the  wishes  of  the 
policy-holder,  and  the  latter  rightly  insist  upon  some 
means  of  close  cooperation. 

Insurance  men  are  further  opposed  to  the  enactment  of 
laws  similar  to  those  of  New  York,  on  the  ground  that  the 
carrying  out  of  such  a  system  of  voting  entails  a  very 
heavy  direct  expense.  They  point  to  the  situation  in 
New  York  where  the  cost  of  counting  the  ballots  alone 
reached  $50,000  for  each  one  of  the  large  companies.  They 
assert  that  such  an  annual  expense  is  a  heavy  burden  to 
place  upon  the  policy-holders,  when,  in  most  cases,  it  is 
not  necessary.  Without  desiring  to  criticize  too  strongly 
the  men  who  were  in  charge  of  the  counting  of  the  ballots 
in  New  York,  it  seems  that  the  work  was  unnecessarily 
drawn  out.  As  a  matter  of  fact,  if  the  inspectors  of  elec- 
tion appointed  by  the  officials  of  the  two  large  companies, 
and  paid  by  the  companies  $25  per  day  for  their  services, 
had  counted  ballots  as  rapidly  as  do  the  judges  of  elections 
in  our  political  contests,  the  votes  would  have  been  counted 
in  perhaps  a  third  of  the  time  it  did  take  to  count  them. 
As  the  ballots  in  the  insurance  election  were  the  simplest 
possible  to  count  —  there  being  no  split  ballots  and  prac- 
tically only  one  office  for  which  to  count,  and  in  one  case 
only  two  tickets,  and  in  the  other  three,  in  the  field  —  it 
does  seem  that  the  suspicion  raised  in  some  quarters  that 
the  contest  was  drawn  out  for  political  effect  is  well 
grounded. 

If  this  is  true,  the  heavy  expenses  of  the  present  election 
cannot  be  used  as  an  argument  against  the  proposed 


310  YALE  READINGS  IN  INSURANCE 

changes.  If  the  suspicion  is  without  truth,  and  the  elec- 
tions are  really  expensive,  it  has  been  already  pointed  out 
that  few  elections  will  be  carried  out  on  the  scale  that  the 
present  contest  has  been  waged.  Admitting,  however, 
that  annual  elections  will  cost  from  thirty  thousand  to  fifty 
thousand  dollars  for  each  company,  it  is  no  conclusive 
argument  against  the  reform  measures.  The  states  might 
well  relieve  the  companies  of  taxation,  and  make  them 
have  annual  elections  for  the  sake  of  securing  the  gain 
that  will  accrue  from  such  a  change. 

It  should  be  noted  that  the  reformers,  as  well  as  insur- 
ance officials,  criticize  the  New  York  law.  The  Armstrong 
law  still  allows  proxy  voting.  The  application  of  proxy 
voting  in  mutual  life  companies  is  a  misapplication  of  a 
system  working  fairly  well  in  joint  stock  concerns.  Under 
the  old  system  of  electing  trustees,  it  was  necessary  to 
allow  the  officers  to  collect  proxies,  but  when  policy-holders 
are  allowed  to  vote  by  mail,  the  system  cannot  be  justified. 
The  man  who  under  the  reformed  conditions  gives  his 
proxy  is  the  man  who  is  not  interested  enough  to  care 
what  the  outcome  is,  and  gives  his  proxy  as  a  personal 
favor  to  the  first  one  who  solicits  it.  The  administration 
is  the  only  party  which  has  the  machinery  necessary  to 
solicit  these  proxies,  therefore  the  disinterested  or  indiffer- 
ent policy-holders  control  the  outcome  of  the  election 
rather  than  the  men  who  are  interested  and  have  informed 
themselves.  That  administration  tickets  won  the  New 
York  elections  was  largely  due  to  the  work  of  agents  in 
solicting  proxy  votes.  While  not  desiring  to  express  any 
opinion  upon  the  outcome  of  the  New  York  elections,  as  a 
general  principle  it  is  wrong  that  the  careless  and  indiffer- 
ent policy-holders  should  dominate  the  situation.  There- 
fore, the  right  of  proxy  voting  should  be  abolished. 

Company  officials  need  not  be  alarmed  if  such  a  system 
of  voting  as  is  here  advocated  be  carried  out.  It  will 
not  mean  frequent  changes  in  management  because  such 
changes  will  be  unnecessary.  The  system  has  been  tried 


CONTROL  OF  LIFE  INSURANCE  COMPANIES    311 

for  many  years  in  the  largest  company  in  the  British 
Empire,  the  Australian  Mutual  Provident  Society.  No 
serious  difficulties  have  arisen  in  connection  with  the  opera- 
tion of  the  system.  There  has  been  but  one  revolution 
in  the  company,  and  this  one  demonstrated  the  merits 
of  the  plan.  Incidentally  it  is  worth  noting  that  this 
company  has  been  one  of  the  best  managed  in  the  world. 
Mr.  Dawson  says  that  in  nearly  all  respects,  dividends, 
economy  of  management,  small  ratio  of  lapses,  growth,  and 
favorable  mortality  experience,  its  career  is  unprecedented.1 
Some  have  said  that  these  large  companies  cannot  be 
run  on  the  basis  of  control  by  policy-holders  because  the 
party  system  cannot  be  adopted.  It  is  hoped  that  the 
last  part  of  this  statement  is  true.  The  control  of  these 
business  corporations  should  be  free  from  politics.  It 
would  be  suicidal  to  subject  them  to  a  change  in  manage- 
ment each  year.  This,  as  has  been  pointed  out,  is  not 
contemplated  in  the  proposed  changes.  Under  the  plan 
which  is  submitted,  it  is  believed  that  managements  will 
be  just  as  stable  as  they  have  been  in  the  past,  indeed 
more  so.  At  every  election  it  will  be  the  administration 
against  the  field,  and  if  the  record  of  the  men  in  power 
has  been  satisfactory,  it  will  commend  the  administration 
ticket  to  the  policy-holders.  The  desire  to  let  well  enough 
alone  will  be  sufficiently  strong  to  resist  a  change,  and 
because  there  exists  an  easy  method  of  turning  out  corrupt 
managements,  these  managements  will  try  not  to  become 
corrupt.  The  officers  will  still  have  a  chance  to  stay  in 
the  business  for  life,  developing  a  great  company,  not 
because  they  control  twenty  or  thirty  thousand  proxy 
votes,  but  because  they  are  efficient. 

1 "  The  Business  of  Life  Insurance, "  p.  128. 


CHAPTER  XXIII 

MISTAKES   IN   STATE   REGULATION   OF   THE   INSURANCE 
BUSINESS  1 

DURING  the  last  three  years  we  have  heard  a  great  deal 
about  the  system  of  American  life  insurance  being  on  trial, 
and  while,  as  a  whole,  it  has  shown  a  remarkably  clean 
record,  unfortunately  some  of  the  charges  made  have  been 
proved.  The  public  in  this  situation  knew  of  but  one 
resource,  legal  regulation,  and  without  stopping  to  con- 
sider how  legal  regulation  has  worked  in  the  past,  demanded 
more  of  it  as  the  remedy  for  present  evils. 

The  public  has  not  realized  that  the  system  of  life  insur- 
ance has  not  been  the  only  culprit  before  the  bar.  Prac- 
tically every  indictment  against  the  insurance  companies 
has  been  an  indictment  against  state  supervision,  with 
which  the  public  has  fondly  hoped  to  reform  the  other 
criminal.  For  more  than  fifty  years  the  states  have  been 
trying  to  regulate  the  business  of  life  insurance.  No  con- 
stitutional limitations  have  hindered  them  in  their  work. 
The  problem  before  them  has  been  clear-cut,  for  the  present 
is  not  the  only  time  that  abuses  in  management  have  been 
exposed.  Other  exposures  have  been  made,  and  there  has 
been  the  same  sort  of  legislation;  yet  it  has  failed  to  pre- 
vent a  recurrence  of  the  abuses.  Before  1905,  the  State 
of  New  York  had  seen  fit  to  amend  her  law  regulating 
investments  twenty-one  times,  but  it  was  found  necessary 
to  make  an  entirely  new  revision  in  the  following  year. 
Since  the  states  have  been  well  aware  of  the  problem 

1  By  Lester  W.  Zartman,  Assistant  Professor  of  Political  Economy 
in  Yale  University.  Reprinted  from  pages  24-43,  Volume  XVII, 
Yale  Review. 

312 


MISTAKES  IN  STATE  REGULATION  313 

before  them,  and  have  not  been  neglectful  of  their  oppor- 
tunities to  try  to  regulate  the  business,  yet  have  failed, 
something  must  be  radically  wrong.  Either  they  have 
pursued  wrong  methods  of  supervision,  or  the  system  of 
supervision  by  the  separate  states  is  incapable  of  accom- 
plishing the  desired  results,  or  both  reasons  explain  the 
half  century  of  failure. 

Let  us  examine  the  situation  and  find  out  wherein  the 
trouble  lies.  In  the  first  place,  have  the  states  attempted 
to  accomplish  the  desired  results  by  wrong  methods  of 
supervision?  Without  going  into  any  extended  history  of 
state  regulation,  let  us  summarize,  briefly,  the  main  lines 
along  which  the  states  have  worked. 

1.  They  have  laid  down  standards  of  solvency;   that  is, 
they  have  determined  what  shall  be  the  maximum  rate  of 
interest,  and  the  rate  of  mortality  used  in  computing  the 
liabilities  of  the  life  insurance  companies. 

2.  They  have  regulated  investments.    Usually  the  regu- 
lations have  simply  restricted  investments  to  certain  classes 
of  securities,  though  many  attempts  have  been  made  to 
prescribe  the  territorial  limits  within  which  the  invest- 
ments must  be  made.    In  doing  this,  the  chief  object  has 
been  to  make  the  companies'  investments  secure,  but  there 
has  also   been  the   idea  of   helping  out  the  commercial 
interests  of  the  state.1 

3.  They  have  attempted  to  secure  some  measure  of 
publicity.    They   have   provided   for   annual  reports   by 
each  company  to  the  state,  compulsory  investigation  by 
the  state  into  the  affairs  of  the  companies,  and  to  carry 
out  the  provisions  of  these  laws  have  created  special  state 
machinery,  that  is,  departments  of  insurance. 

4.  They  have  passed  measures  to  secure  equitable  treat- 
ment of  the  policy-holders,  such  as  non-forfeiture  laws, 
incontestability  laws,  etc. 

1  For  a  full  description  of  the  limitations  placed  upon  the  invest- 
ment powers  of  the  companies,  see  the  author's  "Investments  of  Life 
Insurance  Companies,"  Holt  &  Co.,  1906,  Chapter  VI. 


314  YALE  READINGS  IN  INSURANCE 

Under  these  four  general  headings  can  be  grouped  about 
all  the  regulations  enacted  by  any  state  prior  to  1906. 
During  that  year  and  the  previous  one,  several  legislative 
committees  found  the  life  insurance  business  apparently 
so  mismanaged  that  some  of  the  states  came  to  the  con- 
clusion that  they  ought  to  manage  the  business  of  life 
insurance  themselves.  They  wanted  to  do  this  without 
assuming  the  responsibility  which  state  life  insurance  would 
involve;  they  would  leave  the  business  in  the  hands  of 
private  men  who  would  thus  bear  the  responsibility,  but 
the  legislatures  would  direct  the  business. 

The  way  in  which  the  states  have  attempted  to  manage 
the  business  without  assuming  responsibility  has  been  by 
enacting  laws : 

1.  Limiting  salaries. 

2.  Limiting  amount  of  expense  to  secure  new  business. 

3.  Limiting  surplus. 

4.  Limiting  amount  of  new  business. 

5.  Prescribing  the  methods  of  allotting  dividends. 

6.  Restricting  the  field  of  investment. 

How  much  of  all  this  legislation  is  good;  how  much  of 
it  is  bad?  How  much  of  it  is  in  the  right  direction  and 
will  accomplish  good  results;  how  much  of  it  is  in  the  wrong 
direction  and  will  do  no  good  and  perhaps  cause  serious 
injury?  These  are  questions  which  ought  to  be  settled 
correctly  before  the  laws  are  in  operation  any  longer,  and 
before  other  states  follow  the  example  of  those  which  have 
already  enacted  such  legislation. 

Let  us  examine  this  legislation  in  detail.  In  the  first 
place,  should  the  states  lay  down  standards  of  solvency, 
that  is,  prescribe  the  rate  of  interest  and  the  mortality 
table  to  be  used  in  computing  the  liabilities  of  a  life  insur- 
ance company?  There  is  not  much  objection  to  such  laws. 
As  a  matter  of  fact,  these  laws  have  been  practically  harm- 
less. The  standards  adopted  by  the  states  have  almost 
always  been  much  more  liberal  than  those  which  the 
companies  have  voluntarily  adopted.  In  laying  down 


MISTAKES  IN  STATE  REGULATION  315 

these  fixed  standards  of  solvency,  the  states  have  hindered 
the  development  of  new  plans  for  cheaper  insurance,  but, 
generally  speaking,  no  very  serious  objections  can  be  raised 
against  them.1 

Should  the  states  regulate  investments?  There  are  grave 
reasons  for  believing  that  they  should  not.  The  best  that 
they  can  do  in  this  respect  is  to  limit  the  companies  to 
certain  classes  of  securities;  to  select  specific  securities 
would  be  suicidal.  But  there  is  no  class  of  investments  of 
which  all  in  the  class  are  good.  A  study  of  life  insurance 
mismanagement  will  show  that  mortgage  loans  have  been 
used  just  as  much  for  speculative  purposes  as  has  any 
other  class  of  securities.  There  are  good  securities  in  all 
classes,  and  good  insurance  managers  ought  not  to  have 
their  privileges  in  this  respect  curtailed.  To  curtail  them 
will  mean  a  loss  to  policy-holders.  The  scheming,  self- 
seeking  manager  will  find  in  any  law,  which  can  be  enacted 
regarding  investments,  so  many  chances  to  accomplish  his 
ends,  that  to  limit  the  field  of  investments  is  to  injure  the 
good  manager  without  accomplishing  any  desired  results.2 
The  history  of  investments  shows  that  the  wise  manager 
of  insurance  funds  will  scatter  his  investments.  This 
cannot  be  done  if  the  states  restrict  investments  to  certain 
classes.  Such  laws  should  therefore  be  repealed. 

While  space  will  not  permit  of  any  extended  discussion 
of  individual  acts,  particular  attention  should  be  directed 

JCf.  Emory  McClintock,  "Insurance,  a  Text  Book,"  pp.  129,  130. 
Also  Sheppard  Homans,  Insurance  Year  Book,  1890,  p.  532,  and  the 
report  of  the  committee  on  insurance  appointed  by  the  New  York 
Legislature,  Insurance  Times,  May,  1882. 

2  The  question  of  restricting  investments  has  been  of  such  impor- 
tance that  many  able  articles  have  appeared  on  the  subject.  See  J.  B. 
Gillison,  Transactions  of  the  Faculty  of  Actuaries,  Volume  II,  Part  II, 
p.  104;  Mr.  Wegenast,  Transactions  of  the  Actuarial  Society  of  Amer- 
ica, Volume  VII,  p.  361;  the  Insurance  Spectator,  Volume  VI,  p.  308; 
T.  B.  Sprague,  Assurance  Magazine,  Volume  XVI,  p.  79;  also  George 
King,  Journal  of  the  Institute  of  Actuaries,  1892,  Volume  XXIX,  p. 
496. 


316  YALE  READINGS  IN  INSURANCE 

to  laws  compelling  investments  to  be  made  in  certain 
localities.  The  states  which  have  had  insurance  com- 
panies of  their  own  have  made  attempts,  from  time  to  time, 
to  compel  these  companies  to  invest  their  assets  within 
the  state.1  On  the  other  hand,  the  states  without  such 
companies,  but  paying  premiums,  have  thought  that  they 
were  being  drained  of  their  capital,  and  so  have  passed 
laws  compelling  the  companies  to  invest  at  least  a  portion 
of  the  reserves  within  the  state  where  they  originated. 
It  seemed  a  few  years  ago  as  if  this  type  of  legislation, 
inspired  by  such  selfish  motives,  had  disappeared.  How- 
ever, within  the  last  year,  the  demand  for  such  legislation 
has  reappeared,  especially  in  the  South,  and  has  resulted 
in  action  by  one  state.  In  1907  the  Texas  legislature 
passed  the  Robertson  bill,  and  it  became  a  law.  Accord- 
ing to  the  provisions  of  this  act,  all  companies  doing  busi- 
ness in  Texas  must  invest  75  per  cent,  of  the  reserve  upon 
Texas  policies  in  Texas  securities,  bonds,  stocks,  and 
mortgage  loans,  and  deposit  these  securities  in  Texas, 
subject  to  local  taxation.  The  motive  back  of  the  bill 
was  not  to  secure  safety  to  the  policy-holders;  it  was  passed 
partly  to  create  a  market  for  Texas  securities,  but  mostly, 
judging  from  the  debate  hi  the  legislature,  to  secure 
revenue  for  certain  counties.  Since  the  local  rate  of  taxa- 
tion is  about  2  per  cent.,  the  law  meant  the  confiscation  of 
nearly  one-half  the  interest  necessary  to  mature  the  con- 
tracts. Even  companies  which  had  a  sufficient  sum  in- 
vested in  the  state  to  cover  their  reserves  were  compelled 
to  withdraw  to  avoid  the  excessive  taxation.  Valuable 
agency  organizations  were  broken  up,  and  though  Texas 
is  already  realizing  the  mistake  made,  the  experiment  will 
cost  policy-holders  everywhere  a  goodly  sum.  This  is  an 
extreme  example  of  state  regulation  of  investments,  but 
it  is  typical  of  the  motives  which  have  actuated  much 
legislation. 

1  Cf .  "Investments  of  Life  Insurance  Companies,"  H.  Holt  &  Co., 
pp.  160-165. 


MISTAKES  IN  STATE  REGULATION  317 

Should  the  states  enact  laws  to  secure  the  equitable 
treatment  of  policy-holders?  Like  almost  all  restrictive 
legislation  these  laws  were  passed  to  remedy  certain  abuses, 
but  competition  among  the  companies  was  well  on  the  way 
to  give  all  the  advantages  which  these  laws  give,  before 
the  first  one  was  enacted.  The  companies  have  now 
gone  much  further  in  granting  liberal  advantages  to  the 
policy-holders  than  the  laws  require.  In  fact,  if  the  com- 
petition goes  much  further,  the  legislators,  if  they  are 
true  to  their  traditional  policy  of  intervention,  will  have 
to  enact  laws  prohibiting  the  companies  from  being  too 
liberal  to  their  policy-holders. 

Of  course,  if  a  state,  in  attempting  to  secure  equitable 
treatment  of  the  policy-holders  within  the  state  simply 
secures  what  the  companies  have  willingly  given,  no  objec- 
tion can  be  raised.  But  some  of  the  states,  in  trying  to 
secure  equitable  treatment  of  their  policy-holders,  have 
enacted  very  bad  legislation.  A  large  number  of  states 
make  it  a  necessary  condition  of  entrance  that  out-of-state 
corporations  shall  pledge  themselves,  in  the  event  of  any 
legal  difficulties  arising,  not  to  take  the  cases  out  of  the 
state  courts.1  The  purpose  of  the  laws  is  to  prevent  com- 
panies from  making  litigation  expensive,  a  situation  which 
they  could  stand  better  than  most  policy-holders;  but  the 
result  is  that  the  companies  are  deprived  of  what  really 
is  a  constitutional  right,  the  right  to  a  trial  in  an  unpreju- 
diced court. 

As  another  example  of  similar  legislation,  Alabama,  a 
few  years  ago,  enacted  a  law  providing  that  if  a  life  insur- 
ance company  contested  a  policy  in  that  State  on  the  ground 
of  misrepresentation  in  the  application,  the  company 
should,  before  the  case  could  be  tried,  deposit  with  the 
court  all  premiums  paid  by  the  assured  upon  the  policy. 
If  the  company  won  the  case,  that  is,  proved  the  mis- 

1  Wisconsin  Insurance  Laws,  section  1947  (5) ;  Indiana  Insurance 
Laws,  section  361;  Illinois  Insurance  Laws,  section  375;  Colorado 
Insurance  Laws,  section  29;  Kentucky  Insurance  Laws,  section  631. 


318  YALE  READINGS  IN  INSURANCE 

representation  of  facts  in  the  application,  the  court  should 
pay  back  all  the  premiums  to  the  defrauding  ex-policy- 
holder.1  What  did  this  law  virtually  say  to  the  citizens 
of  Alabama?  It  told  them  to  go  ahead  and  cheat  the  insur- 
ance companies,  to  get  policies  by  fraud  if  they  cared  to 
do  so.  If  they  were  not  caught,  well  and  good;  if  caught, 
they  would  get  their  money  back.  The  law  was  unjust 
in  principle  and  demoralizing  in  its  practice;  yet  it  was 
passed  after  consideration  by  an  American  legislature. 

Coming  now  to  the  new  type  of  legislation,  that  enacted 
since  1905,  and  which  enters  into  the  details  of  manage- 
ment, what  shall  be  said  of  it?  Is  it  the  wise  thing,  the 
proper  thing,  for  the  states  to  limit  the  salaries  which  a  life 
insurance  company  can  pay  to  its  officials?  Salaries  of 
such  men  may  be  too  high,  but  there  is  serious  objection 
to  lowering  them  by  statutory  means.  How  much  is  a 
man  worth?  To  most  men  $25,000  is  a  large  salary;  in 
fact,  few  men  are  worth  that  amount.  Yet  some  men 
may  well  be  paid  twice  that  sum  and  still  be  cheap,  because 
they  will  effect  economies  or  reap  profits  which  will  pay 
their  salaries  several  times  over.  There  are  presidents 
to-day  of  insurance  companies  receiving  so-called  large 
salaries,  who,  from  the  standpoint  of  efficiency,  are  worth 
twice  as  much  as  other  presidents  who  are  receiving  half 
as  much  salary.  It  takes  genius  to  maintain  the  agency 
organization  of  a  life  insurance  company  at  the  highest 
point  of  efficiency;  it  takes  ability  to  invest  and  care  for 
several  hundred  million  dollars  of  assets.  State  legis- 
latures might  well  think  twice  before  placing  a  limit  on 
salaries,  lest  in  so  doing  they  make  it  impossible  for  the 
companies  to  secure  the  kind  of  men  they  need. 

How  much  ought  a  company  to  pay  to  secure  new  busi- 
ness? Frankly,  it  is  a  difficult  question  for  the  most  skilful 
of  actuaries  to  answer.2  If  life  insurance  is  good  for  the 

» W.  H.  Mylrea,  "Insurance,  a  Text  Book,"  p.  871. 
2  Cf.,  Published  letters  of  the  noted  English  Actuary,  George  King, 
to  T.  B.  Macaulay,  September,  1906. 


MISTAKES  IN  STATE  REGULATION  319 

individual  and,  through  the  individual,  for  the  public,  then 
it  is  worth  a  price.  Truly  enough  the  price  may  be  too 
high,  but  that  is  a  problem  for  the  individual  to  solve,  just 
as  is  true  of  the  price  of  bread  and  opera  tickets.  The 
function  of  the  state  in  the  matter  is  not  to  regulate  the 
price,  but  simply  to  put  the  individual  in  possession  of 
the  facts  and  allow  him  to  judge  for  himself. 

Should  the  state  limit  by  law  the  amount  of  new  busi- 
ness which  a  company  can  write?  The  idea  back  of  such 
a  law  is  either  that  a  company  will  become  so  large  as  to 
make  the  men  controlling  its  assets  exercise  a  power  dan- 
gerous to  the  welfare  of  the  state,  or  that  if  some  restraint 
is  not  placed  on  size,  the  race  for  bigness  will  lead  the 
officials  into  bad  practices.  From  either  standpoint  the 
law  is  a  curiosity.1  If  a  company  is  well  managed  it  will 
not  hurt  the  state  by  its  size;  if  it  is  growing  rapidly  be- 
cause it  supplies  insurance  cheaply,  it  ought  to  be  allowed 
to  continue  its  growth.  That  is  what  we  want,  cheap 
insurance  and  lots  of  it.  Therefore,  let  each  company 
write  all  the  insurance  it  can.  The  other  viewpoint,  to 
limit  expenses  by  simply  limiting  size,  is  absurd.  It  is 
an  attempt  to  reverse  economic  law  similar  to  that  made 
by  a  Western  legislator  who  offered  a  bill  calling  for  the 
repeal  of  the  law  of  demand  and  supply. 

Finally,  should  the  states  regulate  the  amount  of  surplus 
which  the  life  insurance  companies  may  accumulate? 
Before  they  do  so,  they  will  have  to  decide  how  much  sur- 
plus a  company  ought  to  have.  It  was  suggested  in  the 
report  of  the  Wisconsin  special  committee  on  insurance 
that  4  per  cent,  would  be  about  the  right  amount.2  The 
legislature  of  New  York  thought  that  5  per  cent,  was  the 

1  Mr.   D.   P.  Fackler  in  an  address  before  the  commissioners  of 
insurance  in  convention  at  St.  Paul,  1892,  gave  arguments  in  favor  of 
regulation.     See  also,  Report  of  New  York  Legislative  Investigating 
Committee,  p.  297. 

2  Report    of    the    Wisconsin    Insurance    Investigating   Committee, 
1906,  p.  90. 


320  YALE  READINGS  IN  INSURANCE 

proper  amount  for  large  companies,  and  so  enacted.1  In 
less  than  a  year  events  proved  that  it  was  a  very  good 
thing  that  the  companies  had  more.  If  they  had  not  pos- 
sessed on  January  1,  1907,  through  past  accumulations,  a 
greater  surplus  than  5  per  cent,  of  liabilities,  and  if  the 
insurance  laws  of  the  state  had  been  strictly  enforced,  we 
would  probably  have  had,  by  December  31,  1907,  the  spec- 
tacle of  large  companies  placed  in  the  hands  of  receivers. 
The  amount  of  surplus  needed  depends  upon  the  character 
of  assets,  and  the  states  might  well  leave  its  amount  to 
be  determined  by  the  men  who  are  responsible  for  the 
safe  conduct  of  the  business. 

What  then  is  our  conclusion  concerning  state  regulation? 
It  has  failed  to  prevent  abuses  in  management;  it  has  not 
succeeded  in  keeping  companies  from  failing.  The  laws 
have  attempted  too  much.  Many  of  them  have  been 
useless;  some  of  them  have  been  harmful  to  the  business 
and  to  the  public;  and  some  of  them  positively  dangerous. 

Some  one  asks,  have  not  evils  really  existed  in  the  busi- 
ness of  life  insurance  for  the  correction  of  which  the  laws 
were  designed?  Yes,  they  have  existed  from  time  to  time. 
Were  there  not  abuses  which  were  really  serious?  Yes. 
Well,  why  not  remedy  them?  Every  one  who  has  the  best 
interests  of  the  business  at  heart  believes  in  remedying 
them.  Some  insurance  men  are  asking  for  the  repeal  of 
the  present  restrictive  laws,  not  because  these  laws  are 
bad  in  principle,  but  because  the  laws  place  obstacles  in 
the  way  of  their  ambitions.  These  men  want  the  laws 
repealed  in  order  that  the  business  may  be  carried  on 
again  under  the  conditions  which  existed  prior  to  1905. 
It  is  not  the  purpose  of  this  paper  to  advocate  a  repeal 
of  the  insurance  laws  for  any  such  purpose.  It  is  devoutly 
hoped  that  many  of  the  conditions  existing  in  the  insurance 
business  prior  to  1905  have  passed  away  forever. 

These  restrictive  laws  are  opposed  because  they  are 
wrong  in  principle,  and  are  bound  to  injure  the  legitimate 

1  Insurance  Laws,  1906,  section  87. 


MISTAKES  IN  STATE  REGULATION  321 

interests  in  the  insurance  business,  while  all  the  good 
which  they  can  accomplish  could  be  accomplished  in  some 
other  way.  This  other  way  has  been  suggested  by  others, 
but  since  it  has  not  been  adopted,  it  should  be  urged  again. 
There  is  good  reason  for  believing  that  if  laws  were  passed 
securing  real  publicity  and  proper  responsibility,  prac- 
tically all  the  other  laws  limiting  and  restricting  the  insur- 
ance business  could  be  repealed.1 

It  is  urged  against  such  a  simple  remedy  that  we  have 
had  publicity  in  the  insurance  business  for  years  and  years, 
and  that  if  it  were  such  a  panacea,  it  would  have  had  better 
results.  Some  good  results  have  come  from  publicity,  but 
the  trouble  is,  in  spite  of  assertions  to  the  contrary,  that 
we  have  not  had  publicity.  To  be  sure,  there  have  been 
annual  reports  of  each  company  published  by  the  state, 
and  investigations  of  companies  by  state  officials,  but 
until  the  last  year  or  so  very  little  has  been  published 
that  the  companies  have  not  wanted  published.  The 
public  has  relied  upon  the  state  departments  of  insurance 
for  information  regarding  the  insurance  companies  trans- 
acting business  in  the  state,  and  these  departments  have 
not  succeeded  in  giving  the  facts.  Every  state  has  created 
a  separate  department  to  look  after  the  insurance  interests 
of  the  commonwealth,  and  has  endowed  this  department 
with  power  to  investigate  companies  and  to  publish  a 
report  of  the  findings.  Either  these  departments  of  insur- 
ance have  not  found  out  the  facts  in  company  manage- 
ments, or,  having  found  the  facts,  have  not  revealed  them 
to  the  public. 

Nowhere  in  our  public  life  can  be  found  better  examples 
of  inefficiency  than  in  our  state  departments  of  insurance. 
The  reason  for  this  is  not  difficult  to  discover.  Like  all 
the  other  state  positions,  they  have  been  made  the  spoils 

1  The  value  of  publicity  and  responsibility  in  the  insurance  busi- 
ness was  suggested  many  years  ago  by  Mr.  Finch  of  Indiana  in  an 
address  before  the  National  Convention  of  Insurance  Commissioners, 
held  at  Harrisburg,  Pa.,  September,  1876. 


322  YALE  READINGS  IN  INSURANCE 

of  the  politician.  In  a  score  of  states,  the  commissioner 
of  insurance,  as  the  head  of  the  department  of  insurance 
is  usually  called,  is  elected  by  a  direct  vote  of  the  people.1 
Under  such  a  condition,  the  official  is  bound  to  be  a  poli- 
tician. In  several  other  states  he  is  elected  by  the  legis- 
lature, and  in  the  remaining  states  he  is  appointed  by  the 
governor,  in  each  case  with  no  better  results  than  when 
elected  directly  by  the  people. 

To  illustrate  the  political  degeneracy  of  the  office,  a 
description  of  the  organization  of  a  department  of  insur- 
ance in  one  of  the  states  may  not  be  out  of  place.  This 
department  at  the  time  referred  to  employed  fifteen  men, 
besides  a  number  of  stenographers.  The  head  of  the 
department  was  a  noted  politician  in  the  state,  who,  after 
a  year's  tenure  of  office,  had  not  yet  taken  the  trouble  to 
read  the  insurance  laws  or  to  post  himself  with  regard  to 
the  requirements  of  the  reports  which  his  department  was 
expected  to  secure  from  the  companies.  The  attorney 
for  the  department,  although  on  a  regular  salary,  found 
little  time  to  give  to  his  work,  since  a  political  campaign 
was  on  that  year  and  his  chief,  the  governor,  needed  help. 
The  chief  clerk,  on  a  salary  of  $3000  per  annum,  came 
down  to  the  department  each  morning  to  open  the  mail, 
a  task  the  two  negro  janitors  might  have  performed  very 
creditably,  and  did  perform  when  it  was  stormy.  Similarly, 
throughout  the  department,  there  were  men  with  official 
titles  who  knew  nothing  about  the  insurance  business, 
rendering  no  service,  but  drawing  good  salaries.  In  the 
rear  room  were  three  men  who  were  the  insurance  brains 
of  the  whole  department.  Holding  office  during  succes- 
sive administrations,  no  commissioner  dared  to  discharge 
them,  for  without  their  aid  not  even  the  routine  of  the  de- 
partment could  be  carried  through.2 

1  In  a  few  states  only  is  the  commissioner  of  insurance  as  such  elected 
by  the  people ;  in  a  large  number  of  states,  however,  some  state  official, 
who  is  elected  by  a  direct  vote  of  the  people,  is  ex-officio  insurance 
commissioner. 

a  Since  one  of  the  charges  which  Governor  Hughes  brought  against 


MISTAKES  IN  STATE  REGULATION  323 

So  it  is  in  most  of  the  states.  To  be  sure,  now  and  then 
an  able  man  has  been  given  the  position  of  commissioner 
of  insurance,  but  most  of  the  commissioners  have  been 
simply  able  politicians.  Even  the  able  commissioners 
have  not  succeeded  in  accomplishing  much,  for  the  tenure 
of  office  is  short,  and  time  has  not  been  given  to  learn  the 
details  of  a  very  technical  business.  The  able  helpers  in 
the  rear  office  have  done  what  they  could  to  protect  and 
foster  the  insurance  interests  of  the  state,  but,  without 
authority,  they  have  not  exercised  much  influence.  They 
can  only  make  recommendations  to  the  head  of  the  depart- 
ment, who  decides  concerning  these  according  to  the  way 
in  which  his  political  life  will  be  influenced.  This,  in  gen- 
eral, is  the  kind  of  state  departments  which  we  have  had, 
and  now  have,  to  administer  the  insurance  laws. 

The  states,  in  giving  to  the  departments  of  insurance  the 
power  to  make  an  investigation  of  the  companies  whenever 
they  saw  fit,  had  the  idea  that  the  departments  would 
watch  the  companies  carefully,  and  would  make  searching 
investigations  of  the  affairs  of  the  different  companies  to 
see  that  no  irregularities  took  place.  How  differently  has 
state  supervision  worked  out  in  practice!  In  many  cases 
there  has  been  no  investigation  into  a  company's  affairs 
until  the  public  demand  for  such  an  investigation  has 
grown  so  insistent  that  the  department  could  not  longer 
remain  inactive.1  Many  of  the  abuses  revealed  by  the 
Armstrong  committee  were  common  knowledge  to  insur- 
ance men  as  early  as  1903.  Syndicate  operations,  year-end 
transactions,  use  of  money  to  help  out  other  enterprises,  — 
all  these  evils  were  freely  hinted  at  in  insurance  circles. 
Under  such  circumstances,  it  was  the  duty  of  the  insurance 
departments  to  make  thorough  investigations  of  those 
companies  under  suspicion.  Instead  of  doing  so,  the  New 

Mr.  Kelsey  was  that  he  had  not  yet  read  the  insurance  laws,  although 
having  been  in  office  nearly  a  year,  it  might  be  well  to  state  that  the 
description  here  given  does  not  refer  to  the  New  York  department. 
1  The  Insurance  Spectator,  Volume  LV,  p.  295. 


324  YALE  READINGS  IN  INSURANCE 

York  department  held  back,  and  it  was  not  until  the  public 
had  become  thoroughly  aroused  by  the  disclosures  made 
in  the  family  quarrel  in  one  company  that  finally  the  super- 
intendent of  insurance  bestirred  himself. 

Even  in  the  cases  where  the  insurance  departments  have 
made  investigations,  these  investigations  have  not  meant 
much.  Sometimes  thorough  examinations  have  been 
made;  more  often  the  examinations  have  been  largely  a 
farce.  When  an  examination  is  made,  the  laws  give  the 
commissioners  the  privilege  of  making  public  only  such 
portions  of  their  findings  as  each  may  deem  fit.  Under 
such  a  law,  a  thorough  examination  has  not  much  terror 
to  evil-doers.  Pressure  can  be  brought  to  bear  upon  a 
complacent  commissioner  to  publish  nothing  disagreeable. 
The  management  promises  to  reform,  the  commissioners 
agree  that  nothing  more  could  be  done  if  the  findings  were 
made  public.  The  result  is  that  disagreeable  things  are 
covered  over,  and  no  one  is  the  wiser. 

Under  such  circumstances,  it  is  not  strange  that  there 
has  been  some  mismanagement.  Really,  the  only  wonder 
is  that  there  has  not  been  more,  for  it  must  be  remem- 
bered that  notwithstanding  the  searching  investigations 
which  have  been  made  into  insurance  affairs  during  the 
past  several  years,  very  little  actual  stealing  has  been 
found.  That  this  has  been  true  speaks  well  for  the  high 
character  in  general  of  the  men  in  charge  of  these  great 
trust  interests. 

However,  the  weak  managers,  the  inefficient  managers, 
the  wrong-doing  managers,  must  be  eliminated  from  the 
business.  To  accomplish  this  result,  there  must  be  pub- 
licity. Are  there  campaign  contributions?  Find  it  out. 
Are  some  of  the  officials  engaging  in  syndicate  operations 
at  the  expense  of  the  policy-holders?  Find  it  out.  Are 
some  companies  depositing  large  amounts  in  trust  com- 
panies to  make  those  companies  profitable?  Find  it  out. 
Are  some  of  the  managers  so  inefficient  that  they  cannot 
get  business  in  any  other  way  than  by  paying  twice  as 


MISTAKES  IN  STATE  REGULATION  325 

much  for  it  as  other  managers  are  paying?  Find  it  out. 
The  policy-holders  have  delegated  to  the  state  the  duty  of 
finding  out  these  things.  The  state  should  find  them  out, 
and  having  found  them  out  should  publish  all  the  facts. 
That  would  be  real  publicity. 

Opponents  of  this  policy  say  that  since  no  one  reads  the 
insurance  reports,  there  is  no  use  of  publishing  in  them  so 
many  facts.  It  is  true  that  the  general  public  takes  but 
little  interest  in  insurance  matters,  save  in  a  time  of  great 
exposures,  but  it  is  a  mistake  to  assume  that  no  one  reads 
the  annual  reports  of  the  insurance  department.  The 
most  vigilant  lot  of  men  in  the  country  are  studying  these 
reports  —  the  agents  of  rival  companies.  They  are  look- 
ing for  faults  of  management  in  other  companies,  and  if 
there  were  real  publicity  of  the  insurance  business,  the 
mismanaged  companies  would  go  to  the  wall  quickly  or 
reform  their  methods  of  doing  business.  Just  to  show 
what  a  little  publicity  will  accomplish,  let  us  consider  the 
action  of  a  large  company  a  few  years  ago.1  The  company 
was  a  good  one,  but  it  was  not  accustomed  to  giving  large 
surrender  values  to  lapsing  policy-holders.  One  year  a 
few  of  the  states  demanded  that  the  companies  report  how 
large  a  per  cent,  of  the  reserves  they  gave  to  lapsed  policies. 
The  next  year  this  company  practically  doubled  the  amount 
it  had  given  heretofore.  It  could  not  afford  to  allow  rival 
agents  that  weapon  against  it.  If  a  little  publicity  will 
secure  such  a  reform,  it  is  easy  to  see  that  full  publicity 
will  bring  great  results. 

Along  with  publicity  must  go  responsibility.  The  day 
of  the  trustee  who  lends  his  name  to  dignify  the  literature 
of  a  life  insurance  company,  and  expects  to  give  nothing 
else,  cannot  pass  away  too  quickly.  In  theory,  the  trustees 
are  supposed  to  watch  carefully  the  conduct  of  the  execu- 
tive officials,  and  to  pass  upon  the  general  business  plans 
to  be  pursued.  No  one  expects  them  to  manage  the  com- 

1  Report  of  the  Wisconsin  Insurance  Investigating  Committee, 
p.  207. 


326  YALE  READINGS  IN  INSURANCE 

panics,  — that  is  the  work  of  the  executive  officials;  but 
the  insuring  public  does  expect  these  bodies  of  trustees  to 
know  perfectly  well  what  is  going  on  within  the  company. 
That  the  trustees  have  not  known  what  was  going  on  has 
been  amply  demonstrated.  If  a  trustee  has  been  more 
than  ordinarily  conscientious,  he  has  attended  the  monthly 
meetings  of  the  board.  He  has  listened  to  the  report  of 
the  officials,  comparing  the  month's  business  with  the  busi- 
ness of  the  same  month  a  year  before,  has  approved  reports 
of  finance  and  other  committees,  perhaps  has  asked  a  few 
questions,  and  then  has  gone  away  none  the  wiser.  What 
he  has  learned  about  the  actual  condition  of  the  company 
is  whatever  the  officials  have  chosen  to  tell  him.  The 
whole  system  is  largely  a  farce,  and  one  can  only  wonder 
that  business  life  will  tolerate  such  conditions. 

The  practice  ought  to  be  changed.  Make  the  trustees 
something  more  than  dignified  figure-heads.1  Since  it  is 
the  function  of  trustees  to  know  what  is  going  on  in  their 
company,  make  them  know.  This  could  be  accomplished 
by  a  very  simple  law.  Make  it  obligatory  for  the  trustees, 
or  at  least  a  committee  of  the  trustees,  to  sign  the  annual 
report  of  the  company,  and  then  hold  these  men  legally 
responsible  for  any  misstatement  contained  in  the  report. 
What  would  be  the  result?  Before  the  committee  of 
trustees  would  sign  the  report  they  would  make  a  searching 
investigation  of  the  affairs  of  the  company,  or,  more  prob- 
ably, would  call  in  professional  accountants  to  make  such 
an  investigation  as  would  reveal  the  true  state  of  affairs. 
Thus,  such  a  law  would  accomplish  two  good  results;  it 
would  make  the  trustees  familiar  with  the  operations  of 
the  company,  and  it  would  insure  to  the  public  true  annual 
reports. 

As  an  indication  of  the  need  of  such  investigations  into 
a  company's  affairs  by  capable  men,  the  experience  of  a 

1  This  question  is  discussed  at  length  in  an  article  by  the  author  on 
"The  Control  of  Life  Insurance  Companies,"  Journal  of  Political 
Economy,  November,  1907. 


MISTAKES  IN  STATE  REGULATION  327 

large  company  a  few  years  ago  may  be  cited.  Certain 
changes  in  the  office  force  made  it  desirable  that  an  exten- 
sive investigation  be  made  into  the  company's  affairs.  A 
well-known  firm  of  accountants  was  employed,  and  the 
officials  of  the  company  themselves  were  surprised  at  many 
of  the  revelations  made.  There  had  not  been  much  actual 
dishonesty,  but  the  officials  did  not  know  the  business. 
They  had  known,  in  a  general  way,  the  total  expenditures 
and  total  receipts,  and  that  so  much  was  going  for  agency 
expenses  and  so  much  somewhere  else,  but  of  what  ex- 
penditures were  paying  and  what  were  not,  they  were 
ignorant.  Thus  a  law  securing  responsibility  might  not 
only  secure  good  moral  management;  it  might  secure 
more  efficient  management. 

The  simplest  and  best  remedy  then  for  the  abuses  in 
insurance  management  is  publicity  and  responsibility.  To 
whom  shall  we  look  to  give  the  public  this  sort  of  legisla- 
tion? The  individual  states  could  follow  out  the  suggestions 
which  have  been  made  in  this  paper,  and  it  is  to  be  hoped 
that  they  may  adopt  them.  But  if  we  are  ever  to  have  a 
comprehensive  solution  of  the  problem  of  legal  regulation 
of  the  insurance  business  in  this  country,  it  will  have  to 
come  through  supervision  by  the  federal  government. 

The  history  of  the  insurance  business  in  this  country  is 
pretty  well  known.  The  companies  started  as  local  con- 
cerns, and  as  such  they  took  out  state  charters,  thus  com- 
ing under  the  jurisdiction  of  the  state  incorporating  them. 
However,  the  companies  soon  found  it  convenient  to 
expand  into  other  states.  Such  expansion  was  necessary 
to  secure  a  wide  distribution  of  risks  and  to  secure  the  econo- 
mies of  business  on  a  large  scale.  That  this  expansion  is 
desirable  for  a  life  insurance  company,  few  would  dispute, 
and  in  the  case  of  a  fire  insurance  company  it  is  absolutely 
essential.  Thus,  some  of  the  companies  have  come  to  do 
business  in  practically  all  the  states,  and  all  the  companies 
are  writing  insurance  in  a  number  of  states.  With  a  sys- 
tem of  supervision  by  the  individual  states,  not  only  is 


328  YALE  READINGS  IN  INSURANCE 

each  company  under  the  jurisdiction  of  the  state  which 
chartered  it,  but  it  is  also  under  the  jurisdiction  of  each 
state  in  which  it  writes  policies. 

Under  such  a  condition,  even  if  we  had  the  very  best 
state  supervision  possible,  there  would  be  trouble.  The 
business  of  a  life  insurance  company  is  a  unit;  it  cannot 
be  divided  up  into  forty-six  different  pieces.  Therefore, 
when  any  state  begins  to  make  regulations  concerning  the 
business  of  one  of  the  companies,  it  is  legislating  for  the 
whole  country.  This  would  not  be  so  bad  if  each  state 
would  make  the  same  laws,  but  they  do  not  and  they 
never  will.  A  problem  of  a  course  of  action  put  to  forty- 
six  good  and  wise  men  will  be  solved  in  forty-six  different 
ways.  Similarly,  if  the  problem  of  supervising  the  insur- 
ance business  is  put  to  forty-six  legislatures,  no  matter 
how  intelligent  and  broad-minded  those  legislatures  may 
be,  we  are  going  to  have  forty-six  different  solutions. 
Witness  the  New  York,  Massachusetts,  and  Wisconsin 
laws  enacted  to  remedy  the  abuses  revealed  by  the  Arm- 
strong committee.  One  would  be  rash  in  saying  that  the 
legislatures  of  these  states  went  about  their  work  with  an 
open  mind,  but  in  general  there  was  a  fairly  honest  endeavor 
to  get  at  some  solution  of  the  difficulties.  All  three  legis- 
latures struggled  with  the  same  problem,  yet  each  reached 
a  radically  different  solution  as  to  the  proper  way  to  super- 
vise the  business  so  as  to  prevent  a  recurrence  of  the  evils. 
So  it  has  been  for  half  a  century.  Each  state  has  gone 
ahead  and  enacted  laws  regulating  the  insurance  business 
without  giving  much  consideration  to  what  the  sister  states 
were  doing.  Sometimes  the  laws  passed  in  various  states 
have  been  contradictory,  but  even  when  they  have  not  been 
contradictory,  they  have  imposed  many  hardships  upon  the 
companies.  Therefore,  because  it  is  a  good  thing  for  the 
public  that  a  company  should  do  business  in  every  state, 
and  since  the  business  of  a  company  is  a  unit,  supervision 
by  the  federal  government  would  still  be  preferable  to  the 
system  of  state  supervision  working  at  its  very  best. 


MISTAKES  IN  STATE  REGULATION  329 

However,  we  must  not  compare  federal  supervision  with 
ideal  supervision  by  the  individual  states,  but  with  state 
supervision  as  it  actually  works  out  in  practice.  To  have 
the  best  state  supervision  it  would  be  necessary  to  have 
legislatures  free  from  prejudice.  We  do  not  have  such 
legislatures.  They  are  composed  of  politicians  whose 
success  often  depends  upon  their  catering  to  local  interests. 
They  do  not  go  about  the  task  of  finding  out  what  is  the 
best  thing  to  do  for  the  insurance  business  in  general, 
but,  actuated  by  narrow  motives,  enact  laws  designed  to 
favor  their  own  particular  state.  Supposedly,  these  laws 
are  for  the  best  interests  of  the  people  of  the  state  which 
enacts  such  laws,  but  granted  that  they  are,  does  any 
state  have  the  right  to  pass  such  laws  as  will  interfere  with 
the  business  of  legitimate  corporations  of  other  states, 
and  injure  the  citizens  of  other  states?  This  question  is  as 
old  as  the  country,  but  the  sooner  it  is  answered  in  the 
negative  concerning  insurance  affairs  the  better  it  will  be 
for  the  public. 

The  feeling  of  animosity  shown  by  many  of  the  states 
towards  the  insurance  companies  of  other  states  has 
resulted  in  so  much  hostile  legislation  that  the  big  problem 
before  us  is  not  to  protect  the  people  from  this  class  of 
corporations,  but  to  protect  these  great  institutions  against 
the  people.  Hostile  insurance  legislation  has  cost  this 
country  far  more  than  has  mismanagement  of  insurance 
companies. 

While  much  harm  is  done  to  the  insurance  business 
because  of  the  jealousy  among  the  states,  the  abatement 
of  that  hostility  brings  out  other  weaknesses  in  state  super- 
vision. As  has  already  been  pointed  out,  if  there  is  to  be 
any  effective  publicity  in  insurance  affairs,  the  supervising 
officials  must  make  searching  investigations  into  the  affairs 
of  the  companies.  Under  the  system  of  state  supervision, 
which  state  shall  make  these  examinations?  Shall  it  be 
the  duty  of  every  state  in  which  the  company  does  business 
to  make  such  an  investigation?  If  all  the  states  should 


330  YALE  READINGS  IN  INSURANCE 

do  so,  the  insurance  companies  would  have  time  for  little 
other  than  examinations.  In  the  early  history  of  super- 
vision, there  was  a  great  deal  of  examining  done  by 
each  state  of  companies,  no  matter  where  chartered.  It 
became  such  an  intolerable  nuisance,  however,  that  there 
has  grown  up  a  sort  of  custom  among  state  insurance 
departments,  called  state  comity.  Under  this  official  cus- 
tom, each  department  tacitly  allows  the  state  in  which 
any  company  is  incorporated  to  investigate  the  financial 
soundness  of  that  company.  In  substance  each  official 
says  to  the  others,  you  let  me  manage  the  companies  of 
my  state,  and  in  return  I  will  let  you  manage  your  com- 
panies. Such  a  solution  of  this  difficulty  was  necessary, 
but  what  is  the  result?  Simply  that  the  whole  country  is 
more  or  less  at  the  mercy  of  the  insurance  official  of  one 
state.  Frequently  it  has  happened  that  certain  officials 
have  had  charge  of  important  companies  and  have  neg- 
lected their  duties,  yet  the  other  commissioners,  bound 
by  custom,  have  been  forced  to  stand  by  and  allow  the 
companies  to  pursue  their  wrong  course  undisturbed.1  This 
is  bad  for  the  business;  it  is  bad  for  the  country;  the 
remedy  is  national  supervision. 

Very  few  are  in  favor  of  national  supervision  of  the  insur- 
ance business  unless  it  means  an  end  to  state  interference 
with  interstate  business.  To  have  the  state  departments 
remain  with  all  their  present  powers,  and  to  add  to  these 
a  national  department  of  insurance,  would  simply  be 
complicating  an  already  very  complicated  situation.  If 
national  supervision,  however,  would  mean  an  end  to 
state  supervision  over  interstate  insurance,  there  are  very 
few  who  understand  the  business  who  would  not  welcome 
the  change.  The  change  ought  to  be  made.  It  is  a  cer- 
tainty that  state  supervision  will  never  be  able  to  cope 

1  For  examples  of  how  this  works  out  in  practice,  see  address  of 
Colonel  Hahn,  Insurance  Commissioner  of  Ohio,  Transactions  of  the 
National  Convention  of  Insurance  Commissioners,  1895;  also  Journal 
of  Insurance  Economics,  1905,  Volume  XII,  p.  113. 


MISTAKES  IN  STATE  REGULATION  331 

with  the  situation.  It  is  not  a  question  as  to  whether  one 
is  a  believer  in  states'  rights  or  a  disbeliever.  It  is  simply 
a  question  as  to  whether  we  are  going  to  have  efficient  gov- 
ernmental supervision  over  this  important  business. 

Besides  the  great  advantage  which  national  supervision 
would  enjoy  over  state  supervision  in  securing  publicity 
and  in  putting  an  end  to  selfish,  sectional  legislation,  there 
would  be  incidental  benefits  of  great  importance.1 

1.  There  would  be  a  great  direct  saving  in  expense  over 
the  present  system.     It  is  wasteful  to  have  forty-six  depart- 
ments each  duplicating  the  work  of  the  other.     Forty-six 
voluminous  reports  are  issued  each  year,  all  containing 
practically  the  same  information.     Forty-five  forty-sixths 
of  this  is  unnecessary,  and  would  be  done  away  with  under 
national  supervision,  resulting  in  the  saving  of  several 
million  dollars  annually. 

2.  National  supervision  would,  it  is  hoped,  result  in  a 
more  equitable  system  of  taxing  the  insurance  business. 
Under  the  system  of  state  taxation,  the  man  who  pays  his 
premiums  into   a  life   insurance   company  is  frequently 
taxed  twice,  and  in  some  cases  three  times.     That  such 
burdens  should  be  placed  upon  men  because,  having  to 
provide  for  their  families,  they  must  needs  have  recourse 
to  life  insurance,  is  a  national  disgrace,  excused  only  on 
the  ground  of  ignorance  of  the  real  nature  of  the  business. 
Since  much  of  this  taxation  is  the  result  of  jealous  fear  of 
the  states  that  the  others  are  profiting  through  the  insur- 
ance business  at  their  expense,  national  supervision  would 
probably  bring  at  least  partial  relief  from  this  burden. 

Some  have  objected  to  national  supervision  on  the  ground 
that  the  insurance  laws  enacted  by  Congress  for  the  Dis- 
trict of  Columbia  are  about  the  worst  on  record.2  The 

1  For  a  discussion  of  the  value  of  national  supervision  in  Canada, 
see  an  article  by  Mr.  Frank  Sanderson,  Transactions  of  the  Actuarial 
Society  of  Edinburgh,  Volume  III,  p.  171. 

2  M.  H.  Robinson,  "  Government  Regulation  of  Insurance,"  Papers 
and  Discussions  of  the  Nineteenth  Annual  Meeting  of  the   American 
Economic  Association,  p.  149. 


332  YALE  READINGS  IN  INSURANCE 

laws  for  the  District  are  bad,  but  this  does  not  mean  much. 
It  takes  time,  energy,  and  ability  to  work  out  a  code  of 
laws  regulating  so  technical  a  business  as  that  of  life  insur- 
ance, and  it  is  easy  to  see  that  while  Congress  would  not  be 
willing  to  give  much  thought  to  a  code  applying  only  to 
the  District  of  Columbia,  the  situation  would  be  entirely 
changed  if  the  question  involved  the  insurance  business 
of  the  whole  country.  In  one  case,  a  few  hundred  thousand 
people,  with  no  representative  in  Congress,  are  involved; 
in  the  other,  eighty  millions  are  concerned.1 

Finally,  is  national  supervision  possible?  This  has  been 
a  question  of  warm  discussion  during  the  last  ten  years. 
A  careful  study  of  the  decisions  of  the  United  States  Su- 
preme Court  would  seem  to  indicate  that  national  super- 
vision of  the  insurance  business  can  come  only  through 
an  amendment  to  the  Constitution,  which  makes  the 
situation  nearly  hopeless.  However,  notwithstanding  the 
definiteness  of  the  decisions  of  the  Supreme  Court,  there 
are  two  grounds  for  believing  that  national  supervision 
may  yet  be  possible.  In  the  first  place,  all  the  decisions 
rendered  by  the  court  have  arisen  from  cases  dealing  with 
state  law.  Congress  has  never  passed  a  law  regulating  the 
business,  and  in  our  theory  of  government,  a  power  not 
exercised  by  the  national  government  is  left  to  the  indi- 
vidual states.  If  Congress  would  once  exercise  control 
over  the  insurance  business,  the  Supreme  Court  very  pos- 
sibly might  uphold  the  action  as  constitutional.  The 
other  ground  on  which  to  base  hope  for  federal  super- 
vision lies  in  a  possible  change  of  mind  on  the  part  of  the 
Supreme  Court.  Conditions  change,  the  personnel  of  the 
court  changes.  With  these  changes,  the  court  several 
times  has  found  occasion  exactly  to  reverse  previous 
decisions.2  It  is  not  unreasonable  to  hope  that  now,  since 

1  For  further  objection  to  national  supervision,  see  E.  P.  Marshall, 
Transactions  of  the  Actuarial  Society  of  America,  Volume  V,  Number 
19,  p.  242. 

2  The  Supreme  Court  has  reversed  previous  decisions  regarding  the 


MISTAKES  IN  STATE  REGULATION  333 

insurance  has  become  of  such  national  importance,  the 
court  may  change  its  decision  regarding  the  power  of  the 
states  to  supervise  this  business. 

Summing  up  then  the  main  contentions  of  this  paper, 
the  conclusion  is  that  the  indictment  against  state  super- 
vision can  be  sustained.  It  has  failed  seriously  in  the  half 
century  that  it  has  been  on  trial.  This  failure  has  been 
due  partly  to  the  fact  that  the  states  have  directed  their 
activities  along  wrong  lines,  and  partly  to  the  fact  that 
there  are  conflicting  interests  among  the  states.  The 
remedy  which  has  been  suggested  is  in  laws  securing  pub- 
licity and  responsibility,  these  laws  to  be  enforced  by  a 
national  department  of  insurance. 

legal  tender  qualities  of  greenbacks,  the  constitutionality  of  income 
taxes,  the  citizenship  of  corporations,  and  the  power  of  railroads  to 
obstruct  navigation  on  streams. 


CHAPTER  XXIV 

FEDERAL  SUPERVISION  OF  INSURANCE  * 

WITHIN  twenty-five  years  what  may  be  called  the 
"insurance  principle"  has  come  to  be  a  notable  factor  in 
the  traffic,  credits,  commerce,  and  the  family  life  of  this 
country.  Invited  by  trunk-line  railroads,  the  telegraph, 
the  telephone,  and  the  welcome  of  a  homogeneous  people, 
the  tendency  of  all  our  activities  has  been  to  expand. 
Insurance  has  kept  pace  with  the  opportunity.  It  now  has, 
through  its  various  forms,  relations  with  substantially 
every  man,  woman,  and  child  in  the  Republic,  and  has  large 
international  relations  as  well.  It  operates  everywhere 
under  governmental  supervision.  In  this  country  alone 
it  must  obey  the  behests  of  forty-six  different  legislatures, 
each  of  which  claims  sovereign  authority  not  only  over  its 
activities  in  that  particular  state,  but,  in  effect,  over  all 
its  activities  throughout  the  world.  A  mere  statement  of 
the  situation  prepares  the  mind  for  the  confusion  and 
injustice  which  characterize  insurance  supervision  as  it 
exists  to-day. 

It  is  a  principle  in  physics  that  two  bodies  cannot  occupy 
the  same  place  at  the  same  time.  The  Great  Teacher  said : 
"No  servant  can  serve  two  masters.  ...  Ye  cannot  serve 
God  and  Mammon."  The  problem  which  faces  the  man- 
agement of  an  active  insurance  company  to-day  is,  how 

1  By  Darwin  P.  Kingsley,  President  of  the  New  York  Life  Insur- 
ance Company.  Reprinted  from  an  address  delivered  before  the 
students  of  the  University  of  Missouri.  The  substance  of  this  address 
was  published  as  an  article  in  The  North  American  Review  for  April, 
1909. 

334 


FEDERAL  SUPERVISION  335 

may  it  profitably,  effectively,  and  peacefully  serve  forty- 
six  masters.  The  problem  is  insolvable.  Under  the 
present  practice  of  insurance  supervision  there  is  no 
remedy.  But  there  is  elsewhere  a  remedy,  and,  to  many 
people,  it  seems  to  be  the  only  remedy,  viz.,  federal  super- 
vision of  interstate  insurance. 

I  by  no  means  think  that  federal  supervision  would 
bring  in  the  millennium,  but  it  would  be  a  long  step  away 
from  the  chaotic  and  destructive  tendencies  which  have 
developed  under  the  existing  plan.  Is  federal  supervision 
possible?  As  against  the  decisions  of  the  Supreme  Court 
-made  not  once  but  several  times  —  is  there  any  prob- 
ability of  such  relief?  l 

Relief  through  an  amendment  to  the  Constitution  of  the 
United  States  would  be  effective,  but  that  is  practically 
unattainable  and  is  probably  unnecessary. 

Is  there  not  a  great  deal  in  the  history  of  the  nation, 
in  the  development  of  national  sentiment,  in  the  develop- 
ment of  national  ideals,  since  the  Constitution  was  adopted, 
which  foreshadows  not  only  the  probability  but,  under  an 
increasing  necessity,  the  certainty  that  interstate  insur- 
ance will  ultimately  come  under  federal  control?  I  think 
there  is.  I  ask  you  now  to  consider  that  probability. 

President-elect  Taft  recently  called  attention  to  some 
of  the  great  virtues  of  the  Constitution,  namely :  it  is  brief, 
general  in  its  terms,  and  obviously  constructed  so  that  the 
powers  granted  to  the  general  government  could  be  de- 
veloped and  determined  as  the  nation  developed.  This, 
as  a  matter  of  fact,  is  what  has  happened. 

It  is  perfectly  clear  to  one  who  studies  the  history  of  the 
nation  under  the  Constitution,  that  but  for  the  wisdom  of 
the  great  men  who  interpreted  that  immortal  instrument 
during  the  early  years  of  its  operation,  national  develop- 
ment might  have  taken  on  a  form  that  would  have  defeated 
the  purposes  of  the  men  who  planned  it.  It  is  probable 

1  Paul  v.  Virginia,  8  Wallace,  168;  Hooper  v.  California,  155  U.  S., 
646;  Cravens  v.  New  York  Life  Ins.  Co.,  176  U.  S.,  962. 


336  YALE  READINGS  IN  INSURANCE 


that  we  as  a  people  owe  almost  as  much  to  Marshall,  the 
great  Chief  Justice  who  gave  the  Constitution  its  national 
meaning,  as  to  the  men  who  drafted  it.  The  doctrine 
which  Marshall  laid  down,  which  was  later  on  reaffirmed, 
which  has  now  come  to  be  perhaps  as  fixed  in  its  meaning 
as  the  Constutition  itself,  is  substantially  this: 

"The  action  of  the  general  government  should  be  applied 
to  all  the  external  concerns  of  the  nation,  and  to  those 
internal  concerns  which  affect  the  states  generally;  while 
to  the  states  is  reserved  the  control  of  those  matters  which 
are  completely  within  a  particular  state,  which  do  not 
affect  other  states,  and  with  which  it  is  not  ^necessary  to 
interfere  for  the  purpose  of  executing  some  of  the  general 
powers  of  the  government."  l 

Many  of  the  problems  which  have  arisen  since  the 
adoption  of  the  Constitution  involve  the  question  of 
whether  it  is  necessary  for  the  general  government  to 
"interfere"  for  the  purpose  of  executing  some  of  its  general 
powers.  Is  it  necessary  now,  is  it  likely  to  become  in- 
creasingly necessary,  that  the  government  should  interfere 
in  insurance  for  the  purpose  of  executing  some  of  its 
general  powers? 

I  speak,  of  course,  as  a  layman.  I  shall  not  attempt 
to  make  what  may  be  called  a  legal  argument.  I  speak 
as  one  having  close  relations  to  an  interest  which  involves 
people  in  every  state  in  the  Union,  and  in  nearly  every 
country  of  the  civilized  world.  I  speak  as  a  practical 
man,  dealing  with  one  of  those  situations  which  make  the 
lawyers  now  and  then  understand,  and  make  even  the 
Courts  understand,  that  laws  and  courts  and  constitutions 
exist  for  the  people,  that  the  people  do  not  exist  for  the 
benefit  of  institutions. 

In  order  to  consider  what  the  probabilities  of  federal 
supervision  are,  it  will  be  profitable  to  review  briefly  some 
of  the  things  that  have  happened  in  the  course  of  our 
national  development. 

1  Gibbons  v.  Ogden,  9  Wheaton,  1. 


FEDERAL  SUPERVISION  337 

You  understand,  of  course,  that  the  radical  difference 
between  government  as  it  existed  under  the  old  Confedera- 
tion, and  government  as  it  has  grown  up  under  our  Consti- 
tution, is  this:  The  Confederation  was  strictly  a  union 
between  independent  states  acting  as  states;  our  present 
government  is  a  union  between  states  in  which  the  central 
government  acts  directly  upon  the  individual  citizen,  and 
not  upon  the  states  composing  the  government.  This 
is  supposed  to  be  our  great  contribution  to  the  science  of 
government.  There  is  a  sharp  difference  of  opinion  as  to 
who  discovered  it.  Some  credit  its  discovery  to  Benjamin 
Franklin  and  some  to  Pelatiah  Webster;  but  Mr.  John 
Fiske  has  pointed  out  that  the  principle  was  embodied 
in  the  ancient  federation  of  Greek  cities  known  as  the 
Achaean  League,  and  is  present  in  the  modern  federation 
of  the  cantons  which  constitute  the  republic  of  Switzerland. 
He  further  declares  that  the  principle  was  never  fairly 
demonstrated  and  never  could  be  until  it  was  applied  to  a 
large  and  populous  country  through  a  considerable  period 
of  time.  We  have  supplied  these  conditions  and  this  is 
properly  speaking  our  contribution  to  the  science  of 
government.  And  beyond  question  in  its  continued 
success  lies  the  best  hope  for  the  future  peace  of  the  world. 

The  difference  between  the  two  kinds  of  government 
does  not  at  first  blush  seem  to  be  great,  but,  as  a  matter 
of  fact,  the  two  types  are  almost  as  far  apart  as  the  poles. 

The  departure  involved  in  the  new  type  was  much 
clearer  to  our  forefathers  than  it  is  to  us.  Under  the  Con- 
federation they  had  won  independence.  They  recognized 
the  pressing  need  of  a  different  and  a  stronger  plan,  but 
about  the  old  plan  clustered  traditions  and  the  memory  of 
struggles  which  went  back  almost  to  Jamestown  and  to 
Plymouth.  In  order  to  create  the  beginnings  of  a  nation, 
they  had  to  exercise  a  forbearance,  a  charity,  and  a  wisdom 
which  are  a  constant  source  of  wonder  to  the  student  of 
that  period.  Once  get  yourself  into  the  atmosphere  of 
those  times,  get  even  an  approximate  idea  of  their  passion 


338  YALE  READINGS  IN  INSURANCE 

for  local  self-government  —  the  idea  of  sovereignty  which 
had  seized  on  the  people  of  each  of  the  original  thirteen 
states  —  understand  the  variety  and  even  the  hostility 
of  their  interests,  and  then  consider  the  instrument  which 
that  devoted  body  of  men  wrought  out  in  Philadelphia  in 
1787,  and  the  marvelous  work  it  has  since  done  in  nation 
building,  and  you  will  understand  why  Thomas  Jefferson 
pronounced  it  the  work  of  demigods;  and  you  will  have  a 
higher  appreciation  too  of  the  truth  of  what  Gladstone 
said  later,  namely,  that  it  is  "the  most  wonderful  piece 
of  work  ever  struck  off  at  a  given  time  by  the  brain  and 
purpose  of  man."  It  was  a  series  of  compromises  —  com- 
promises between  the  larger  and  the  smaller  states,  com- 
promises with  slavery,  compromises  all  through  —  but  the 
great  principle  then  adopted,  which  has  more  and  more 
asserted  itself,  which  has  developed  the  instinct  of  nation- 
ality, which  preserved  the  nation  through  a  fearful  war, 
which  has  developed  it  territorially  from  the  Atlantic  to 
the  Pacific  and  across  the  Pacific,  is,  that  the  general 
government  acts  for  the  general  welfare,  that  it  acts 
directly  on  the  individual  and  acts  in  whatever  way  it  is 
necessary  for  it  to  act  for  the  purpose  of  executing  its 
general  powers. 

However  keen  the  vision  of  Washington  and  Franklin 
and  Madison  and  Hamilton  —  the  men  who  dominated 
the  Constitutional  Convention  —  however  much  they  may 
have  seen  that  the  future  of  free  government  and  the  de- 
velopment of  human  liberty  were  wrapped  up  in  their 
plan,  the  people  of  that  time  were  impelled  by  no  such 
motives.  They  were  passionately  devoted  to  their  local 
sovereignty.  To  them  the  creation  of  a  new  style  of 
government  was  largely  a  question  of  commercial  peace 
between  the  states  and  with  foreign  countries.  The  situa- 
tion substantially  compelled  them  to  recognize  the  neces- 
sity of  a  central  government  strong  enough  to  keep  the 
peace  and  to  regulate  commercial  intercourse.  The  Revo- 
lution itself  had  been  largely  brought  about  by  commercial 


FEDERAL  SUPERVISION  339 

considerations.  The  British  government  sought  to  keep 
the  colonies  in  subjection  for  purposes  of  favorable  trade, 
and  against  this  the  colonies  rebelled.  After  independence 
had  been  won  a  situation  bordering  on  anarchy  quickly 
developed.  Foreign  countries  were  unwilling  to  enter 
into  treaties  with  the  United  States  under  the  articles  of 
Confederation.  The  Confederation  had  no  control  over 
commerce,  and  commercial  war  l  in  a  variety  of  forms  soon 
developed.  This  condition  growing  out  of  the  feebleness 
of  the  federal  government  resulted  in  a  deep  and  general 

1  Only  British  built  ships,  owned  and  navigated  by  British  sub- 
jects, were  allowed  to  trade  between  New  England  and  the  British 
West  Indies.  American  ships  trading  directly  with  Great  Britain 
were  allowed  to  carry  only  articles  produced  in  the  particular  states 
of  which  their  owners  were  citizens.  Massachusetts,  New  Hampshire, 
and  Rhode  Island  prohibited  British  ships  from  carrying  goods  out 
of  their  harbors,  and  imposed  a  heavy  duty  on  all  goods  brought  in  by 
such  ships.  New  York  imposed  a  double  duty  on  goods  imported  in 
British  ships.  Pennsylvania  levied  duties  for  the  benefit  of  local 
manufacturers.  Congress  was  unable  to  persuade  the  states  to  carry 
out  the  recommendations  it  had  agreed  to  in  the  treaty  of  peace  with 
England  respecting  the  treatment  of  loyalists  and  the  payment  of 
private  debts  owing  to  British  subjects.  In  retaliation  and  to  the 
great  humiliation  of  the  new  nation,  British  garrisons  were  not  with- 
drawn from  Ogdensburg,  Oswego,  Niagara,  Detroit,  and  Mackinaw 
until  eight  years  after  the  adoption  of  the  Constitution.  The  Confed- 
eration had  no  power  to  lay  and  collect  taxes  or  duties,  and  it  was 
unable  to  pay  the  ragged  Continentals  who  had  won  our  independence. 
The  nation  was  too  poor  to  bribe  the  Barbary  pirates  and  too  weak 
to  chastise  them,  and  American  ships  were  plundered  in  the  Medi- 
terranean and  American  sailors  —  citizens  who  had  established  our 
independence  —  were  sold  as  slaves  in  the  markets  of  Tripoli  and 
Algiers. 

Under  the  union  between  the  states  as  such,  with  no  power  in  the 
central  government  to  act  directly  on  the  individual  citizen,  control 
over  what  was  common  to  all  the  states  naturally  failed,  and  it  was 
followed  by  a  commercial  war  between  the  states  themselves.  Con- 
necticut opened  her  ports  to  British  ships  and  levied  duties  on  imports 
from  Massachusetts.  Pennsylvania  discriminated  against  Delaware 
and  New  Jersey.  New  York  required  vessels  from  Connecticut  and 
New  Jersey  to  pay  entrance  fees  and  obtain  clearances  at  the  custom 


340  YALE  READINGS  IN  INSURANCE 

conviction  that  commerce  ought  to  be  regulated  by  Con- 
gress, and  found  expression  in  the  commerce  clause  of  the 
Constitution.  As  to  the  breadth  of  the  powers  contained 
in  this  clause,  Chief  Justice  Marshall  said: 

"It  is  not,  therefore,  a  matter  of  surprise  that  the  grant 
should  be  as  extensive  as  the  mischief,  and  should  compre- 
hend all  foreign  commerce  and  all  commerce  among  the 
states." 

The  departures  of  the  new  instrument  from  the  old  were 
so  radical  that  many  of  the  states  hesitated,  and  yet,  as 
we  can  see  now  and  as  they  came  to  see,  there  was  nothing 

house  the  same  as  foreign  ships.  Crippled  in  her  foreign  trade  and 
oppressed  with  debt,  Massachusetts  laid  a  heavy  tax  on  land,  and 
presently  what  is  known  as  Shay's  Rebellion  broke  out. 

The  same  chaos  existed  in  monetary  affairs.  There  was  no  national 
coinage  law  until  1785,  and  no  money  was  coined  until  1793.  The  gold 
and  silver  coins  in  use  were  English,  Spanish,  French,  and  German. 
Notwithstanding  the  disastrous  experience  of  the  country  with  the  irre- 
deemable paper  issued  by  authority  of  Congress  during  the  Revolu- 
tion, seven  of  the  states  resorted  to  the  same  expedient  and  some  of 
them  attempted  to  enforce  its  use  as  legal  tender.  This  resulted  in 
litigation  and  a  general  paralysis  of  local  trade.  The  efforts  of  Rhode 
Island  to  enforce  the  use  of  paper  money  as  legal  tender  gave  her  the 
nickname  of  "Rogues'  Island." 

That  commercial  necessities  initiated  the  movement  which  resulted 
in  calling  the  convention  which  framed  the  Constitution  is  a  fact  not 
generally  known.  In  1785  Washington  became  president  of  a  com- 
pany for  extending  the  navigation  of  the  Potomac  and  James  rivers. 
This  could  not  be  done  unless  Virginia  and  Maryland  acted  together. 
Washington's  plans  involved  a  connection  between  the  head  waters 
of  the  Potomac  and  the  Ohio,  and  therefore  Pennsylvania  was  invited 
to  become  a  party  to  the  enterprise.  The  papers  as  finally  sent  to 
the  legislatures  of  Maryland  and  Virginia  contained  a  suggestion  made 
by  Washington  himself,  that  these  two  states  should  agree  upon  a  uni- 
form system  of  duties  and  other  commercial  regulations  and  upon  a 
uniform  currency.  Both  states  ratified  such  a  compact,  and  Mary- 
land then  proposed  that  Delaware  also  be  consulted,  and  that  the  plan 
include  a  canal  between  the  Delaware  River  and  Chesapeake  Bay. 
Maryland  finally  suggested  that  all  the  states  be  invited  to  send  com- 
missioners to  the  conference.  Nine  states  complied,  and  delegates 
from  five  states  met  at  Annapolis  in  September,  1786.  New  Jersey 
instructed  her  delegates  "to  consider  how  far  a  uniform  system  in 


FEDERAL  SUPERVISION  341 

else  for  them  to  do.  It  was  this  or  anarchy.  But  even 
after  the  states  had  all  ratified  the  Constitution,  and  the 
new  nation  had  been  launched  upon  its  career,  the  people 
found  it  difficult  to  take  their  own  medicine. 

But  steadily  the  national  ideal  gained  ground.  Slowly 
the  general  government  extended  its  operations  from  the 
external  concerns  of  the  nation  and  from  those  internal 
concerns  which  affect  the  states  generally,  to  those  with 
which  it  was  necessary  for  it  to  interfere,  and  with  which 
it  had  the  right  to  interfere  through  its  direct  operation 
on  the  citizen,  for  the  purpose  of  executing  its  general 

their  commercial  relations  and  other  important  matters  might  be  neces- 
sary to  the  common  interest  and  permanent  harmony  of  the  several 
states."  The  conference  noted  the  phrase  "other  important  matters" 
and  considered  it  an  improvement  on  the  original  plan.  In  this 
appears  a  recognition  of  the  necessity  of  some  action  dealing  with  the 
general  commercial  chaos  which  then  ruled.  The  Annapolis  confer- 
ence resulted  in  no  definite  action  except  the  adoption  of  an  address 
written  by  Alexander  Hamilton,  urging  that  commissioners  be  ap- 
pointed by  all  the  states  to  meet  in  Philadelphia  in  May,  1787,  "to 
devise  such  further  provisions  as  shall  appear  to  them  necessary  to 
render  the  Constitution  of  the  federal  government  adequate  to  the 
exigencies  of  the  Union,  and  to  report  to  Congress  such  an  act  as, 
when  agreed  to  by  them,  and  confirmed  by  the  legislatures  of  every 
state,  would  effectually  provide  for  the  same."  This  address,  born  of 
a  commercial  question,  resulted  directly  in  the  Constitutional  Conven- 
tion. At  first,  the  Continental  Congress  refused  to  notice  the  Annap- 
olis conference  and  the  address  which  resulted  from  it.  They  said 
the  conference  was  an  irregular  body  without  authority.  But  the 
states,  wiser  than  the  Congress,  led  by  Virginia,  began  to  appoint 
delegates,  and  when  New  York  refused  her  assent  to  a  plan  of  Congress 
for  levying  and  collecting  duties  on  imports,  thereby  further  emphasiz- 
ing the  impotency  of  Congress  itself,  a  reluctant  consent  was  given, 
and,  as  a  salve  to  the  pride  of  its  members,  Congress  itself  issued  a  call 
for  a  convention  identical  with  that  of  the  Annapolis  conference.  This 
convention  in  the  summer  of  1787,  working  behind  closed  doors, 
finally  produced  an  instrument  which  did  not  satisfy  any  one  at  the 
time,  to  which  some  of  the  states  gave  tardy  and  reluctant  assent  — 
and  almost  no  state  was  more  grudging  and  tardy  than  New  York  — 
but  to  which  all  the  states  finally  assented,  although  in  two  cases 
assent  was  delayed  until  after  government  under  the  Constitution  had 
existed  for  some  time. 


342  YALE  READINGS  IN  INSURANCE 

powers.  Every  inch  of  the  ground,  however,  has  been 
fought  over.  And  that  contest,  involving  always  more  or 
less  clearly  the  development  of  national  powers  as  against 
the  powers  of  the  states,  has  been  a  leading  issue  between 
political  parties  —  whenever  there  has  been  a  clear  issue 
—  from  that  day  to  this. 

Naturally  the  Federalists  who  had  been  most  active  in 
advocating  the  adoption  of  the  Constitution  favored  a 
liberal  construction  of  it.  They  wanted  it  to  become 
effective.  Their  opponents  —  then  called  Republicans  — 
favored  a  strict  interpretation  of  it.  The  Federalists, 
forced  by  the  situation  to  take  the  initiative,  obliged  to  do 
whatever  was  necessary  through  taxation  and  otherwise 
to  carry  on  the  new  government,  did  not  long  endure. 
Then  came  Thomas  Jefferson,  nominally  the  founder  of 
the  party  of  strict  construction.  The  burden  of  the  new 
government,  with  its  then  more  or  less  undefined  relations 
to  the  states,  with  its  powers  undeveloped,  fell  on  men 
who  were  supposed  to  be  least  in  sympathy  with  the 
national  idea.  An  emergency  which  put  them  to  the  test 
quickly  arose.  In  the  struggle  for  the  possession  of  the 
Mississippi,  Jefferson  proposed  and  Congress  authorized 
the  purchase  of  the  Island  of  Orleans  and  what  was  called 
West  Florida.  In  the  end  they  bought  the  whole  ancient 
province  of  Louisiana,  a  tract  of  land  richer  and  larger 
in  area  than  the  original  thirteen  states.  Although 
Jefferson  had  advocated  the  smaller  purchase,  and  there 
was  no  difference  in  principle  between  what  was  originally 
proposed  and  what  was  finally  done,  yet  he  believed  that 
in  signing  the  treaty  of  purchase  he  had  "done  an  act 
beyond  the  Constitution."  He  could  find  in  the  Consti- 
tution no  authority  for  such  a  proceeding.  His  friends 
believed  that  in  the  treaty-making  power  he  had  sufficient 
authority,  and  Chief  Justice  Marshall  in  1828  confirmed 
that  view  in  an  important  decision,  when  he  said : 

"The  Constitution  confers  absolutely  on  the  government 
of  the   Union   the   powers  of  making  war  and   making 


FEDERAL  SUPERVISION  343 

treaties;  consequently  that  government  possesses  the  power 
of  acquiring  territory  either  by  conquest  or  treaty." 

Such  are  the  curious  ways  of  politicians  that  the 
Federalists,  who  before  the  purchase  had  urged  the  most 
extreme  measures  to  secure  navigation  of  the  Mississippi, 
now  vehemently  questioned  both  the  constitutionality 
and  the  wisdom  of  an  act  which  not  only  secured  the 
Mississippi  but  an  empire  besides. 

The  people,  however,  with  an  instinct  which  fore- 
shadowed the  decision  of  Marshall,  approved  the  act;  they 
recognized  that  it  was  clearly  in  the  line  of  national  aspira- 
tions, that  it  tended  to  insure  the  peace  and  the  safety  of 
the  Republic.  This  was  perhaps  the  first  great  instance 
in  which,  by  interpretation  and  by  acquiescence  on  the 
part  of  the  people,  a  way  was  found. 

Following  the  path  upon  which  Jefferson  first  entered, 
we  purchased  Florida,  we  discovered,  explored,  and  settled 
the  Oregon  country,  we  annexed  Texas  on  the  petition  of 
its  people.  We  acquired  California,  Nevada,  Arizona, 
New  Mexico,  and  portions  of  Colorado  and  Oklahoma. 
We  purchased  Alaska.  We  annexed  Hawaii  on  the  peti- 
tion of  its  de  facto  government.  We  took  the  Philippines, 
Porto  Rico,  and  Guam.  In  five  of  these  eight  cases,  addi- 
tions to  our  territorial  domain  were  made  and  the  highest 
function  of  sovereignty  was  exercised,  when  the  federal 
government  was  under  the  control  of  the  party  popularly 
known  as  the  party  of  strict  construction. 

Twelve  amendments  were  made  to  the  Constitution 
during  the  first  fifteen  years  of  its  existence.  During  the 
next  sixty-two  years  none  were  made.  In  this  era  the 
Constitution  was  being  interpreted.  The  executive  and 
the  courts  were  slowly  finding  out  the  powers  granted 
either  specifically  or  by  implication,  and  they  found  all 
that  was  necessary  to  carry  on  the  national  government. 
The  growth  of  federal  power  during  that  time  was  very 
great,  and  in  that  period  the  citizens  of  the  states  trans- 
ferred to  their  national  citizenship  a  large  part  of  the  love 


344  YALE  READINGS  IN  INSURANCE 

and  reverence  which  they  had  formerly  bestowed  upon 
their  state  citizenship.  The  conviction  constantly  in- 
creased that  under  the  Union  and  the  Constitution  there 
was,  upon  the  whole,  better  freedom  and  greater  happiness 
than  could  possibly  be  secured  in  any  other  way.  The 
purchase  of  Louisiana  and  the  second  war  with  Great 
Britain  led  the  administration  irresistibly  along  the  path 
of  a  liberal  interpretation  of  the  Constitution.  They  may 
not  have  altogether  liked  it.  There  was  nothing  else  for 
them  to  do.  The  embargo  which  they  had  denounced  in 
1793,  they  employed  in  1807.  The  United  States  Bank, 
which  they  had  denounced  in  1791  and  refused  to  recharter 
in  1811,  was  rechartered  by  an  almost  unanimous  vote  in 
1816.  They  followed  so  closely  the  lines  laid  down  by 
the  Federalists  that  Josiah  Quincy  declared  the  Repub- 
licans had  out-federalized  federalism.  But  the  triumphs 
of  both  parties  were  the  triumphs  of  national  ideals.  This 
is  probably  much  clearer  to  us  than  it  was  to  them.  The 
father  of  strict  construction  took  the  first  step  in  the 
policy  of  expansion  which  has  secured  us  our  preeminence 
on  the  North  American  continent,  and  the  last  of  his  great 
contemporaries,  by  an  equally  wise  and  daring  exercise 
of  executive  power,  put  an  end  to  foreign  aggressions 
upon  this  continent.  The  Monroe  doctrine  has  no  other 
standing  in  the  Constitution  than  this:  that  the  Constitu- 
tion made  the  United  States  a  sovereign  nation  with  cer- 
tain ideals  which  are  to  be  pursued,  and  with  which  further 
foreign  aggressions  in  this  hemisphere  would  interfere. 
It  is  curious  that  this  doctrine  also  has  found  its  strongest 
supporters  amongst  the  strict  constructionists,  and  in  our 
own  day  a  President  who  would  not  annex  Hawaii  upon 
the  petition  of  its  de  facto  government  put  more  stiffening 
into  the  backbone  of  the  Monroe  doctrine  than  it  had 
received  since  Secretary  Seward  politely  requested  Napo- 
leon III  to  get  out  of  Mexico. 

With   the  expansion   of   the   national   domain   to   the 
Pacific  came  the  necessity  of  easier  access  to  that  coast 


FEDERAL  SUPERVISION  345 

and  of  a  naval  station  in  Caribbean  waters.  The  story 
of  negotiations  forwarding  these  purposes  is  a  long  one, 
and  includes  many  failures,  but  the  idea  has  never  been 
abandoned,  and  now  the  United  States  owns  Porto  Rico 
and  is  making  the  "dirt  fly"  in  digging  a  canal  connecting 
the  Atlantic  and  the  Pacific,  a  great  waterway  which, 
when  completed,  will  be  entirely  under  the  control  of  the 
United  States. 

The  supreme  event  in  the  development  of  national  ideals 
came  to  an  issue  in  1860.  African  slavery  existed  in  every 
state  of  the  Union  but  one  when  the  Constitution  was 
adopted,  and  its  status  under  the  new  government  was 
one  of  the  compromises  of  the  Constitution.  The  words 
slave  and  slavery  were  carefully  avoided  in  wording  that 
instrument,  and  it  was  then  the  general  opinion  that  the 
institution  would  gradually  die  out.  The  ordinance  of 
1787,  one  of  the  last  enactments  of  the  old  Confederation, 
assented  to  by  all  the  states,  had  consecrated  the  North- 
west territory  to  freedom,  but  the  Louisiana  Purchase 
contained  no  such  provision,  and  over  the  settlement  and 
government  of  that  vast  region  was  ultimately  waged  a 
conflict  which  tested  the  vitality  and  established  the 
power  of  the  nation.  During  the  years  which  preceded 
this  conflict,  the  anti-slavery  party  pursued  its  ideal  of 
limiting  slavery  within  a  certain  area,  while  the  pro- 
slavery  party  persistently  followed  its  purpose  of  pro- 
tecting slavery  in  the  unorganized  territory  of  the  country 
and  in  the  erection  of  new  slave  states  whenever  the 
people  so  desired.  Both  parties  claimed  the  sanction  of 
the  Constitution. 

We  sometimes  lose  sight  of  the  great  issue  of  that  fear- 
ful struggle.  We  have  just  celebrated  the  centenary  of 
the  birth  of  Abraham  Lincoln,  whose  election  to  the 
Presidency  precipitated  the  conflict.  We  have  heard 
much  of  Lincoln  the  "Emancipator,"  and  we  have  been 
told  that  the  Civil  War  was  fought  in  order  to  abolish 
slavery.  Lincoln  knew  better  than  this.  He  realized 


346  YALE  READINGS  IN  INSURANCE 

that  the  great  thing  to  be  done  was  to  preserve  the  Union 
and  the  principles  of  government  and  of  nationality  which 
it  embodied.  You  remember,  in  his  first  inaugural  address, 
he  said  to  those  whom  he  called  his  "dissatisfied  fellow- 
countrymen": 

"You  can  have  no  oath  registered  in  Heaven  to  destroy 
the  government,  while  I  shall  have  the  most  solemn  one 
to  'preserve,  protect,  and  defend'  it.  The  mystic  chords 
of  memory,  stretching  from  every  battlefield  and  patriot 
grave  to  every  living  heart  and  hearthstone  all  over  this 
broad  land,  will  yet  swell  the  chorus  of  the  Union,  when 
again  touched,  as  surely  they  will  be,  by  the  better  angels 
of  our  nature." 

He  stated  the  issue  as  between  the  Union  and  slavery  in 
1862,  when  Horace  Greeley  published  in  the  Tribune  an 
open  letter  urging  a  more  decided  policy  on  the  part  of 
the  government  with  respect  to  slavery.  Lincoln  replied, 
in  that  immortal  declaration  with  which  you  are  all 
familiar : 

"If  there  be  those  who  would  not  save  the  Union  unless 
they  could  at  the  same  time  save  slavery,  I  do  not  agree 
with  them.  If  there  be  those  who  would  not  save  the 
Union  unless  they  could  at  the  same  time  destroy  slavery, 
I  do  not  agree  with  them.  My  paramount  object  is  to 
save  the  Union,  and  not  either  to  save  or  destroy  slavery. 
If  I  could  save  the  Union,  without  freeing  any  slave,  I 
would  do  it;  if  I  could  save  it  by  freeing  all  the  slaves,  I 
would  do  it;  and  if  I  could  do  it  by  freeing  some,  and  leav- 
ing others  alone,  I  would  also  do  that.  What  I  do  about 
slavery  and  the  colored  race,  I  do  because  I  believe  it  helps 
to  save  this  Union.  And  what  I  forbear,  I  forbear  be- 
cause I  do  not  believe  it  would  help  to  save  the  Union. 
I  shall  do  less  whenever  I  shall  believe  that  what  I  am 
doing  hurts  the  cause,  and  I  shall  do  more  whenever  I 
believe  doing  more  will  help  the  cause." 

Lincoln's  supreme  purpose  and  the  issue  of  the  war  was 
the  preservation  of  the  Union.  When  he  thought  that 


FEDERAL  SUPERVISION  347 

such  action  would  help  to  save  the  Union,  he  issued  the 
Emancipation  Proclamation.  But  it  was  a  war  measure 
distinctly  unauthorized  by  the  Constitution  up  to  the  time 
of  the  adoption  of  the  thirteenth  amendment. 

Another  long  struggle  which  resulted  in  a  great  advance 
in  national  ideals  was  in  the  field  of  finance.  When  the 
Constitution  was  adopted,  the  nation  as  such  had  no 
revenue,  no  credit.  But  Alexander  Hamilton,  the  first 
and  greatest  Secretary  of  the  Treasury,  putting  into  effect 
the  powers  granted  by  the  Constitution,  soon  wrought 
what  seemed  a  miraculous  change.  As  Webster  said: 
"He  smote  the  rock  of  the  national  resources,  and  abundant 
streams  of  revenue  gushed  forth.  He  touched  the  corpse 
of  public  credit,  and  it  sprung  upon  its  feet."  One  of  the 
means  employed  was  a  United  States  Bank,  chartered  by 
Congress.  The  strict  constructionists  contended  that  the 
government  had  no  authority  to  charter  a  bank.  Its  right 
to  do  so  was  upheld  by  the  Supreme  Court  on  the  ground 
that  it  was  a  suitable  agency  in  borrowing  money  which 
the  government  had  an  undoubted  right  to  do.  The  con- 
test was  a  long  and  bitter  one  and  the  strict  construction- 
ists refused  to  recharter  the  bank  in  1811,  but  were  glad 
to  do  so  in  1816  when  the  currency  had  been  demoralized 
by  the  second  war  with  Great  Britain.  Prosperity  brought 
some  abuses,  and  all  the  old  rancor,  and  the  bank  was  dis- 
continued in  1836,  and  a  new  era  of  wild-cat  money  fol- 
lowed in  certain  sections  which  lasted  until  the  Civil  War. 
Again  the  banks  suspended  specie  payments  and  the  federal 
government  issued  legal  tender  notes,  established  the 
national  banking  system,  and  finally  taxed  state  bank 
issues  10  per  cent.  The  first  and  last  of  these  acts  were 
opposed  as  unconstitutional,  but  they  were  upheld  by 
the  Supreme  Court.1  Thus  what  is  peculiarly  a  preroga- 
tive of  sovereignty  was  transferred  from  the  states  to  the 

1McCulloch  v.  Maryland,  4  Wheaton,  316;  Legal  Tender  Cases, 
12  Wallace  457;  110  U.  S.,  447;  National  Bank  v.  United  States,  101, 
U.  S.,  1. 


348  YALE  READINGS  IN  INSURANCE 

national  government  through  a  process  of  interpretation, 
in  response  to  national  needs  and  through  interference 
which  was  necessary  in  order  to  carry  out  the  general 
powers  of  the  government. 

Let  us  consider  a  little  more  closely  the  logic  by  which 
this  great  transformation  was  accomplished.  We  may 
find  some  comfort  therein.  Fifty  years  ago,  if  any  one  had 
said  that  within  ten  years  we  should  have  only  national 
currency  and  none  issued  by  state  banks,  he  would  have 
been  laughed  at.  Where  would  Congress  find  authority 
to  take  this  prerogative  away  from  the  states?  Let  us 
follow  the  Supreme  Court's  logic. 

The  Constitution  gives  Congress  power  "to  borrow 
money  on  the  credit  of  the  United  States  and  to  coin 
money,  regulate  the  value  thereof,  and  of  foreign  coin." 
The  Constitution  as  a  whole  makes  the  United  States  a 
sovereign  nation.  Now  notice  the  links  in  the  chain  of 
reasoning.  Congress  has  power  to  borrow  money;  therefore 
it  may  charter  a  bank  as  an  aid  in  borrowing  money.  A 
bank  so  chartered  may  be  taxed  by  the  states  only  in  such 
a  manner  as  Congress  permits.  Congress  may  borrow 
money,  and  the  United  States  is  a  sovereign  nation ;  there- 
fore it  may  emit  bills  of  credit  and  make  them  legal  tender. 
Congress  has  power  to  borrow  money;  therefore  it  may 
enact  a  national  banking  law  authorizing  banks  thereunder 
to  issue  circulating  notes  based  on  the  security  of  United 
States  bonds  deposited  with  the  government.  Congress 
may  borrow  money;  having  under  this  power  undertaken 
to  supply  the  country  with  a  stable  currency,  it  may  pre- 
vent the  circulation  as  money  of  any  notes  not  issued  under 
its  authority  by  taxing  all  other  issues  out  of  existence. 

This  was  going  a  long  way;  it  was  clearly  one  of  the 
occasions  when  Congress  found  it  necessary  to  "interfere," 
for  the  purpose  of  executing  its  general  powers. 

A  striking  example  of  the  exercise  of  sovereignty  which 
is  not  contemplated  in  the  Constitution  is  seen  in  the  con- 
trol and  disposition  of  what  is  known  as  the  public  do- 


FEDERAL  SUPERVISION  349 

main.  To  Maryland  belongs  the  credit  of  taking  a  step 
which  was  of  far-reaching  importance  in  arousing  a  national 
sentiment.  When  the  Articles  of  Confederation  were 
proposed,  Maryland  refused  to  adopt  them  unless  certain 
other  states  would  cede  their  unorganized  Western  lands 
to  the  United  States.  This  was  done,  and  these  lands 
became  the  first  strong  bond  of  union.  Settlers  on  these 
lands  and  those  afterward  acquired  took  title  from  the 
general  government,  and  there  are  few  pages  in  our  history 
which,  upon  the  whole,  record  sounder  and  more  construc- 
tive statesmanship  than  those  which  relate  to  this  subject. 
Under  whatever  law  the  settler  took  his  title,  the  fact 
was  that  the  general  government  was  using,  and  wisely 
using,  the  national  domain  to  develop  a  national  ideal. 
It  all  followed  logically  from  the  act  of  Maryland,  from 
the  Louisiana  Purchase,  and  from  the  construction  put 
upon  the  Constitution  by  Chief  Justice  Marshall. 

But  these  public  lands  have  also  been  used  to  foster 
education.  It  is  estimated  that  over  one  hundred  million 
acres  of  the  public  domain  have  been  given  to  the  different 
states  for  educational  purposes.  Where  in  the  Constitution 
is  specific  authority  given  to  Congress  to  give  away  public 
lands  to  men  who  settle  on  them  and  improve  them,  or  to 
states  for  educational  purposes?  The  word  education  does 
not  occur  in  the  Constitution.  Congress  has  power  to  make 
all  needful  rules  and  regulations  respecting  the  territory  or 
other  property  belonging  to  the  United  States,  and  from 
these  few  words  has  been  deduced  the  authority  to  govern 
territory  belonging  to  the  United  States  as  well  as  absolute 
control  of  her  lands  whether  within  state  or  territorial 
limits.  Clearly  these  provisions  for  education  were  made 
with  slight  reference  to  explicit  constitutional  authority. 
The  action  was  taken  because,  under  our  form  of  govern- 
ment, homes  and  education  are  amongst  the  most  cherished 
national  ideals;  because  it  seemed  necessary  that  the  gov- 
ernment interfere,  in  the  execution  of  its  general  duties  and 
powers. 


350  YALE  READINGS  IN  INSURANCE 

The  states  ceded  to  Congress  under  the  new  Constitution 
the  power  to  regulate  commerce  with  foreign  nations  and 
among  the  several  states  and  with  the  Indian  tribes,  but 
here  again  they  found  it  difficult  to  take  their  own  medi- 
cine. It  was  not  easy  to  give  up  this  prerogative  of 
sovereignty.  Almost  immediately  the  question  arose, 
What  is  commerce?  It  was  soon  decided  that  commerce 
was  something  more  than  traffic  or  trade,  —  it  included 
transportation,  transportation  of  passengers  as  well  as  of 
goods.  When  steam  came  into  use  as  a  motive  power, 
that  became  an  issue;  but  it  was  decided  that  commerce 
included  all  the  means  as  well  as  the  subjects  of  trans- 
portation. When  the  electric  telegraph  came  into  use, 
it  was  decided  that  this  was  a  medium  of  commercial 
intercourse.  When  the  telephone  came  into  use,  the  same 
reasoning  made  its  use  between  states  interstate  commerce. 
At  first  Congress  was  considered  as  having  jurisdiction 
only  over  waters  affected  by  the  tide,  but  this  authority 
was  soon  extended  to  all  navigable  waters  upon  which 
interstate  commerce  is  carried  on,  and  to  bridges  over 
navigable  waters  separating  two  states.  At  the  present 
time  the  authority  of  Congress  extends  to  the  places,  the 
means,  and  the  subjects  of  trade  and  commerce.1 

Since  the  passage  of  the  Interstate  Commerce  Act  of 
1887,  there  has  been  a  remarkable  increase  in  the  activity 
of  the  federal  government  with  respect  to  control  over 
interstate  commerce.  President  Eliot  of  Harvard  Uni- 
versity not  long  ago  stated  that  our  entire  domain  between 
the  Atlantic  and  the  Pacific,  between  Mexico  and  Canada, 
was  really  not  as  large  as  New  England  was  sixty  years  ago, 
and,  as  a  problem  in  commerce  and  transportation,  nothing 
like  as  large  as  the  original  thirteen  states.  We  have 

1  Gibbons  v.  Ogden,  9  Wheaton,  1 ;  Gloucester  Ferry  Co.  v.  Penn- 
sylvania, 114  U.  S.,  196;  Moran  v.  City  of  New  Orleans,  112  U.  S.,  69; 
Passenger  Cases,  7  Howard,  283;  Walling  v.  Michigan,  116  U.  S.,  446; 
Tel.  Co.  v.  Texas,  U.  S.,  460;  Pa.  Tel.  Co.,  48  N.  J.,  Eq.  91,  20,  Atl. 
846,  27  Am.  St.  Rep.,  462. 


FEDERAL  SUPERVISION  351 

moved  on  into  what  is  almost  a  new  world.  We  are  facing 
new  problems.  We  are  facing  the  further  development 
of  national  ideals.  We  cling  as  tenaciously  as  our  fore- 
fathers did  to  what  we  call  the  right  of  local  self-govern- 
ment. What  we  are  now  and  then  asked  to  give  up  seems 
to  us  much  more  vital  than  what  they  were  asked  to  sur- 
render in  the  general  interest.  We  can  see  how  necessary 
it  was  for  them  to  do  it.  It  is  not  so  easy  for  us  to  under- 
stand the  force  and  direction  of  the  conditions  which  we 
face.  We  have  the  most  extended  system  of  railroad 
transportation  in  the  world.  The  use  of  the  telegraph 
and  the  telephone  has  extended  throughout  the  nation. 
Many  important  types  of  business  are  organized  on  con- 
tinental lines.  The  question,  then,  is:  When  we  insist  on 
what  we  call  local  self-government  as  against  the  obvious 
significance  of  such  facts  as  these,  are  we  not  as  short- 
sighted as  our  forefathers  would  have  been  if  they  had 
carried  their  opposition  to  the  Constitution  further  than 
they  did?  The  fact  is,  we  are  still  entirely  devoted  to 
local  self-government.  But  what  is  local  self-government? 
When  a  business  naturally  extends  over  all  the  states  of 
the  United  States,  is  it  local  self-government  to  attempt 
to  regulate  it  in  forty-six  different  places  by  forty-six 
separate  sovereign  authorities?  Under  these  conditions 
is  not  the  local  idea  plainly  encroaching  on  the  national 
prerogative? 

On  all  these  large  questions  the  government  has  not 
acted  until  it  was  obliged  to.  There  has  been  no  aggression 
as  against  the  states.  Looking  back  at  these  contests  — 
in  which  the  issue  was  frequently  doubtful  —  we  see  that 
no  other  solution  was  possible,  that  there  was  nothing 
else  for  the  government  to  do,  nothing  else  for  the  Supreme 
Court  to  do.  When  Livingston  and  Monroe  purchased 
Louisiana,  there  was  nothing  for  Jefferson  and  Congress 
to  do  but  just  what  they  did.  When  the  question  of  a 
national  currency  became  critical,  there  was  nothing  for 
Congress  to  do  but  what  it  did,  or  something  similar,  and 


352  YALE  READINGS  IN  INSURANCE 

there  was  nothing  for  the  Supreme  Court  to  do  but  to 
sustain  it.  When  the  question  of  railroads  arose,  it  was 
already  a  large  question  before  it  became  a  federal  ques- 
tion; it  involved  interests  so  extensive  that  the  country 
generally  appreciated  its  importance  and  understood  that 
half-way  measures  would  not  do. 

Unfortunately  for  us,  the  Supreme  Court  declared 
insurance  to  be  neither  commerce  nor  an  instrumentality 
of  commerce  in  the  case  of  Paul  v.  Virginia  (1868),  long 
before  many  people  had  any  adequate  notion  of  what 
insurance  was  to  do  and  to  be.  It  is  useless  now  to  con- 
jecture what  the  makers  of  the  Constitution  would  have 
done  if  insurance  had  at  that  time  been  the  large  subject 
it  is  to-day.  It  is  useless  to  conjecture,  too,  what  the 
Supreme  Court  might  have  done  in  the  case  of  Paul  v. 
Virginia,  if  Congress  had  previously  legislated  upon  the 
assumption  that  interstate  insurance  was  interstate  com- 
merce. 

The  chaotic  condition  which  existed  in  the  commerce 
between  the  states  was,  as  we  have  seen,  one  of  the  things 
that  drove  the  states  toward  a  "more  perfect  union." 
That  condition,  in  a  more  or  less  aggravated  form,  has 
existed  in  insurance  for  eighty  years.  In  1829  Pennsyl- 
vania levied  a  tax  of  20  per  cent,  on  the  premiums  of  other 
state  companies.  This  was  done  under  the  familiar  plea 
of  protecting  the  business  of  domestic  corporations.  There 
was  a  similar  tax  of  10  per  cent,  in  New  York  from  1828 
to  1837.  In  1851  New  York  by  means  of  a  deposit  law 
drove  all  other  state  companies  but  two  beyond  its  borders, 
and  when  the  other  states  retaliated,  the  New  York  State 
companies  withdrew  from  them.  In  1874  California  by 
radical  legislation  drove  twenty-nine  companies  out  of  her 
jurisdiction.  Recently  nearly  all  the  life  companies  with- 
drew from  Texas  and  Wisconsin  because  of  oppressive 
legislation,  and  eight  withdrew  from  New  York  State  for 
the  same  reason.  A  Missouri  law  allows  no  company  to 
do  business  within  her  borders  which  pays  salaries  above 


FEDERAL  SUPERVISION  353 

a  certain  limit.  Many  of  the  states  refuse  admission  to 
companies  of  other  states  unless  they  in  advance  agree  to 
surrender  the  protection  of  the  Federal  Courts,  and  to  that 
extent  their  rights  under  the  Constitution  of  the  United 
States.  Most  of  the  states  have  on  their  statute  books, 
in  their  insurance  laws,  that  relic  of  barbarism,  the  lex 
talionis,  the  law  which  exacts  an  eye  for  an  eye,  a  tooth 
for  a  tooth.  The  condition  is  becoming  progressively 
worse.  It  is  akin  to  those  which  existed  one  hundred 
and  twenty  years  ago  with  respect  to  commerce.  It  is 
not  unlike  those  which  then  existed  regarding  foreign 
intercourse,  public  credit,  currency,  and  that  comity 
between  states  which  makes  for  union  and  peace.  The 
problems  of  commerce,  of  expansion  of  public  credit,  of 
currency,  were  solved  by  the  action  of  the  general  govern- 
ment either  through  its  specific  or  its  implied  powers. 
There  is  apparently  no  other  method  by  which  the  problem 
of  insurance  supervision  can  be  solved. 

The  Supreme  Court  has  said  that  insurance  is  not  com- 
merce. It  has  further  said  that  a  state  may  exact  from 
a  foreign  corporation  seeking  admission  to  its  borders, 
compliance  with  any  condition  it  sees  fit  to  impose.1 
These  two  pronouncements  face  insurance  on  the  one  side, 
and  the  chaos  resulting  from  trying  to  obey  forty-six  dif- 
ferent masters  at  the  same  time  confronts  it  on  the  other. 

Toward  these  decisions  of  the  Supreme  Court  we  main- 
tain the  attitude  that  Lincoln  assumed  toward  the  Dred 
Scott  decision.  He  said: 

"It  is  not  resistance,  it  is  not  factious,  it  is  not  even 
disrespectful,  to  treat  it  as  not  having  yet  quite  estab- 
lished a  settled  doctrine  for  the  country.  .  .  .  The  Court 
that  made  it  has  often  overruled  its  own  decisions,  and 
we  shall  do  what  we  can  to  have  it  overrule  this.  We  offer 
no  resistance  to  it." 

While  the  Supreme  Court  has  several  times  flatly  said 

»  Nutting  v.  Massachusetts,  183  U.  S.,  553,  556,  46  L.  Ed.,  324,  325, 
22  Sup.  Ct.  Rep.,  238,  239. 


354  YALE  READINGS  IN  INSURANCE 

that  insurance  is  not  commerce,  I  think  it  by  no  means 
impossible  that  later  on  it  may  take  a  different  view.  I 
am  not  sure  that  it  has  not  already  done  so.  The  relations 
of  things  have  changed.  And  wise  courts  interpret  con- 
stitutions in  the  light  of  changed  conditions  and  in  the 
interest  of  all  the  people. 

Insurance  is  business.  It  includes  the  purchase  and 
sale  of  contract  rights  which  have  become  an  almost 
indispensable  factor  in  business,  in  credit  and  in  traffic. 
It  is  a  business  that  from  its  very  nature  is  most  secure 
when  widely  distributed,  and  it  naturally  and  inevitably 
has  become  an  interstate  business.  It  is  a  business  which 
from  its  character  requires  a  reasonable  measure  of  govern- 
mental supervision,  and  at  the  present  time  it  is  more  ex- 
tensively supervised  by  governments  than  any  other  class 
of  business.  There  is,  perhaps,  no  business  in  which 
efficiency  and  economy  are  so  much  promoted  by  uni- 
formity of  legal  requirements  everywhere;  no  business 
that  is  more  easily  embarrassed,  harassed,  and  rendered 
inefficient  and  unprofitable  by  conflicting  laws  and  con- 
ditions. 

But  the  Supreme  Court  has  said  that  it  is  not  com- 
merce. The  transportation  of  goods  and  passengers  is 
commerce,  and  all  the  means  used  as  instrumentalities 
thereof  are  commerce.  The  sale  of  goods  by  sample  by 
drummers  is  commerce,  but  the  sale  of  life  insurance 
policies  by  agents  is  not  commerce.  A  telegraphic  message 
relating  to  a  life  insurance  policy  —  or  any  other  kind  of 
business  —  is  commerce,  but  the  policy  itself,  sent  by  mail 
or  otherwise,  is  not  commerce.  If  a  company  talks  to 
an  insurant  in  a  neighboring  state  over  the  telephone,  the 
talk  is  commerce,  but  the  subject  of  the  talk  is  not. 


I  have  now  briefly  reviewed  some  of  the  instances  in  the 
history  of  the  country  which  have  resulted  in  the  develop- 
ment of  national  ideals  and  the  expansion  of  national 
power.  My  purpose  has  been  to  show  that  Congress, 


FEDERAL  SUPERVISION  355 

under  the  Constitution  and  under  the  wise  rulings  of  the 
Supreme  Court,  has  always  had  power  sufficient  to  meet 
any  emergency,  and  that  such  emergencies  have  always 
been  met  in  the  interest  of  the  whole  people.  I  might 
rest  here  and  have,  I  think,  a  very  good  case.  Having 
pointed  out  the  inevitable  chaos  and  confusion  which 
have  followed  the  attempt  entirely  to  supervise  the  busi- 
ness of  insurance  by  forty-six  different  authorities,  having 
shown  the  hopelessness  of  any  attempt  to  secure  efficient 
administration  through  harmony  of  action  amongst  the 
states,  it  is  a  fair  deduction  to  say  that  a  business  invol- 
ving such  large  interests,  capable  of  such  great  usefulness, 
a  business  so  necessarily  interstate  in  its  nature,  is  entitled 
somehow,  some  way,  to  just  supervision  and  wise  control. 
And  as  that  cannot  be  had  under  the  present  system, 
relief  from  the  general  government  must  in  time  come  by 
force  of  circumstances  and  through  the  logic  which  has 
so  nobly  served  the  people  from  the  time  of  John  Marshall 
to  the  present  day. 

The  force  of  such  conditions  has  already  asserted  itself, 
and  unless  I  misread  the  mind  of  the  Supreme  Court  in  a 
leading  case,  relief  from  an  illogical  and  reactionary  con- 
dition is  already  in  sight. 

In  1902  the  Supreme  Court  of  the  United  States,  in  its 
interpretation  of  the  powers  of  Congress  under  the  com- 
merce clause  of  the  Constitution,  went  farther  than  ever 
it  had  gone  before.  The  case  before  the  Court  was  that 
of  Champion  v.  Ames,  and  will  be  familiar  to  you  as  the 
"Lottery  Case."  *  By  this  decision  the  validity  of  an  act 
of  Congress  for  the  suppression  of  lottery  traffic  through 
international  and  interstate  commerce  and  the  postal 
service  was  sustained.  As  I  read  the  entire  case  the  pre- 
vious declarations  of  the  Court  that  insurance  is  not  com- 
merce are  therein  substantially  overruled;  and,  under  the 
doctrine  laid  down,  it  seems  reasonably  clear  that  if  Con- 
gress should  now  pass  an  act  providing  for  federal  super- 

»  Champion  v.  Ames,  188  U.  S.,  492. 


356  YALE  READINGS  IN  INSURANCE 

vision  and  regulation  of  interstate  insurance,  the  Supreme 
Court  would  be  bound  to  sustain  it. 

Counsel  for  the  lottery  company  urged  that  a  contract 
of  lottery  was  substantially  the  same  as  a  contract  of 
insurance,  and  that  the  principle  in  the  two  could  not  be 
distinguished.  The  minority  of  the  Court,  for  whom 
Chief  Justice  Fuller  delivered  the  dissenting  opinion, 
urged  the  same  doctrine,  and  pointed  out  that  the  Court 
had  already  decided  that  insurance  contracts  are  not 
articles  of  commerce;  that  they  are  not  subjects  of  trade 
and  barter  offered  in  the  market  as  something  having  an 
existence  and  value  independent  of  the  parties  to  them; 
that  they  are  not  commodities  to  be  shipped  from  one 
state  to  another  and  then  put  up  for  sale.  The  logic  of 
which  was  that  the  sale  of  lottery  tickets  being  indistin- 
guishable in  principle  from  the  sale  of  insurance  policies 
must  necessarily  fall  outside  the  commerce  clause  and 
outside  the  power  of  Congress  to  regulate.  In  effect, 
therefore,  the  relation  of  insurance  to  the  commerce  clause 
of  the  Constitution  was  before  the  Court  and  was  fully 
discussed.  Not  only  was  it  discussed  in  the  briefs  of  the 
appellant,  but  it  was  apparently  a  part  of  the  oral  argu- 
ment; and  the  case  of  Paul  v.  Virginia  was  the  leading  case 
upon  which  the  minority  of  the  Court  based  their  dissent. 

In  delivering  the  majority  opinion  of  the  Court  in  the 
lottery  case,  Mr.  Justice  Harlan,  singularly  enough,  made 
no  reference  to  the  insurance  cases.  Insurance,  as  such, 
was  not  before  the  Court,  and  there  was,  therefore,  no 
controlling  reason  why  the  Court,  if  it  believed  that  the 
doctrine  laid  down  in  Paul  v.  Virginia  was  an  error, 
should  so  state.  If,  however,  a  majority  of  the  Court 
believed  that  the  sale  of  lottery  tickets  could  be  distin- 
guished in  principle  from  the  sale  of  insurance  policies,  it 
is  fair  to  assume  that  they  would  have  said  so.  This 
would  have  been  the  natural  thing  to  do.  The  argument 
of  the  lottery  people  was:  Lottery  is  like  insurance,  there- 
fore it  is  not  commerce.  The  Court  decided,  without 


FEDERAL  SUPERVISION  357 

refuting  the  argument  on  that  point,  that  the  interstate 
sale  and  carriage  of  lottery  tickets  is  commerce.  In 
reaching  this  decision  the  Court  sought  first  for  a  defini- 
tion of  the  word  "commerce"  as  used  in  the  Constitution, 
and,  amongst  other  things,  said: 

"Undoubtedly  the  carrying  from  one  state  to  another 
by  independent  carriers  of  things  or  commodities  that  are 
ordinarily  subjects  of  traffic  and  which  have  in  themselves 
a  recognized  value  in  money  constitutes  interstate  com- 
merce. But  does  not  commerce  among  the  several  states 
include  something  more?  Does  not  the  carrying  from  one 
state  to  another  by  independent  carriers  of  lottery  tickets 
that  entitle  the  holder  to  the  payment  of  a  certain  amount 
of  money  therein  specified  also  constitute  commerce 
amongst  the  states?" 

After  various  citations,  seeking  rather  to  arrive  at  a 
definition  of  what  commerce  is,  the  Court  said: 

"They  (the  cases  cited)  show  that  commerce  among 
the  states  embraces  navigation,  intercourse,  communica- 
tion, traffic,  the  transit  of  persons  and  the  transmission 
of  messages  by  telegraph."  (He  would  now  add  trans- 
mission of  messages  by  telephone.)  "They  also  show  that 
the  power  to  regulate  commerce  among  the  several  states 
is  vested  in  Congress  as  absolutely  as  it  would  be  in  a 
single  government  having  in  its  Constitution  the  same 
restrictions  of  the  exercise  of  the  power  as  are  found  in 
the  Constitution  of  the  United  States." 

Then  without  specific  reference  to  that  case,  the  Court 
met  the  doctrine  laid  down  in  Paul  v.  Virginia  in  this 
language : 

"It  was  said  in  argument  that  lottery  tickets  are  not 
of  any  real  or  substantial  value  in  themselves,  and  there- 
fore are  not  subjects  of  commerce.  If  that  were  conceded 
to  be  the  only  legal  test  as  to  what  are  to  be  deemed  sub- 
jects of  commerce  that  may  be  regulated  by  Congress,  we 
cannot  accept  as  accurate  the  broad  statement  that  such 
tickets  are  of  no  value." 


358  YALE  READINGS  IN  INSURANCE 

This  language  is  very  significant.  In  logical  effect 
it  overrules  the  doctrine  laid  down  in  Paul  v.  Virginia. 
It  intimates  that  an  interstate  transaction  may  be  com- 
merce even  if  the  article  transported  has  no  value  in 
itself.  But,  finding  some  actual  value  in  a  lottery  ticket, 
the  Court  brushed  all  other  considerations  aside  and  said: 
"Lottery  tickets  are  subjects  of  traffic,  and  therefore  sub- 
jects of  commerce." 

Every  element  of  value  which  the  Court  found  in  lottery 
tickets  exists  also  in  insurance  policies.  The  Court  found 
that  lottery  tickets  had  value  because  of  a  large  capital  prize 
to  be  paid  to  the  holder  of  the  winning  ticket,  because  of 
large  deposits  of  money  in  different  banks  in  the  United 
States  insuring  the  prompt  payment  of  prizes.  Lottery 
tickets  were  subjects  of  traffic  because  they  could  be  sold, 
and  they  had  a  value  even  in  states  which  made  the  draw- 
ing of  lotteries  illegal.  The  parallel  between  such  condi- 
tions and  those  which  attach  to  insurance  is  almost  perfect. 

Whether  the  Court  recognized  at  the  time  that  the 
doctrine  in  Champion  v.  Ames  overrules  the  doctrine 
in  Paul  v.  Virginia,  must  be  a  matter  of  opinion  until  a 
direct  test  is  made  under  similar  conditions;  but  it  is 
evident  from  the  text  of  the  two  opinions  then  rendered 
that  there  was  a  vigorous  interchange  of  ideas  between 
the  various  members  of  the  Court  before  the  opinions 
were  arrived  at. 

"Could  Congress,"  asked  the  Chief  Justice,  "compel  a 
state  to  admit  lottery  matter  within  it  contrary  to  its  own 
laws?"  And  the  answer  of  the  majority  opinion  clearly 
would  be,  "Yes,  Congress  could."  It  would  simply  be 
unwise  legislation,  and  by  way  of  rebuttal  the  majority 
opinion  adds: 

"The  possible  abuse  of  the  power  is  not  an  argument 
against  its  existence.  There  is  probably  no  governmental 
power  that  may  not  be  exerted  to  the  injury  of  the  public. 
The  remedy  is  that  suggested  by  Chief  Justice  Marshall 
when  he  said :  '  The  wisdom  and  the  discretion  of  Congress, 


FEDERAL  SUPERVISION  359 

their  anxiety  for  the  people  and  the  influence  which  their 
constituents  possess  at  elections,  are  in  this,  as  in  many 
other  instances,  the  sole  restraints  on  which  they  have  to 
rely  to  secure  them  from  abuse.'" 

Apparently  anticipating  that  some  one  might  miscon- 
strue the  effect  of  the  lottery  decision,  the  Court  said : 

"We  decide  nothing  more  in  the  present  case  than  that 
lottery  tickets  are  subjects  of  traffic  among  those  who 
choose  to  sell  or  buy  them;  the  carriage  of  such  tickets  by 
independent  carriers  from  one  state  to  another  is,  there- 
fore, interstate  commerce." 

Insurance,  with  a  hesitancy  which  is  not  readily  under- 
stood, has  never  made  any  serious  attempt  to  secure 
action  by  Congress.  The  insurance  cases  went  before  the 
Court  supported  by  no  declaration  from  Congress  that  the 
business  is  commerce,  —  a  situation  which  itself  invited 
an  adverse  conclusion.  Whenever  the  question  has  been 
raised  since  then,  immediately  Paul  v.  Virginia  and  the 
other  cases  in  which  opinion  has  followed  the  doctrine 
of  that  case  have  been  cited,  and  the  matter  has  been 
dropped  as  hopeless.  But  the  lottery  case  has  vastly 
changed  the  whole  situation.  These  insurance  cases  may 
now  be  treated  as  Lincoln  treated  the  Dred  Scott  decision. 
They  "have  not  quite  established  a  settled  doctrine  for 
the  country."  The  lottery  case  affords  abundant  warrant 
for  a  request  that  Congress  now  act.  A  law  should  be 
drawn  on  the  theory  that  interstate  insurance  is  commerce, 
and  that  the  power  of  Congress  to  regulate  insurance  in 
its  interstate  relations  is  absolute.  Presented  with  such 
an  act,  the  Supreme  Court,  with  the  deference  which  it 
has  always  observed  toward  Congress,  would,  we  believe, 
be  disposed  to  accept  the  declaration  by  Congress  that 
interstate  insurance  is  commerce  and  is  subject  to  control 
by  Congress.  If  a  case  were  to  arise  under  such  an  act, 
it  is  difficult  to  see  how  the  Court  could  render  any 
different  decision  from  that  in  the  lottery  case.  In  the 
lottery  case  the  Court  was  probably  seeking  to  put  an 


360  YALE  READINGS  IN  INSURANCE 

end  to  a  great  public  evil,  to  abate  a  great  public 
scandal.  It  was  obvious  that  the  evil  would  not  and 
could  not  be  ended  by  the  states,  and  therefore  the 
power  to  deal  with  the  situation,  which  must  lie  some- 
where, was  recognized  as  being  in  Congress  under  the 
commerce  clause. 

Insurance  would  present  a  case  in  which  the  law  and  the 
Court  would  be  invoked,  not  to  abate  or  destroy  an  evil, 
but  to  conserve  and  protect  a  great  public  utility.  It 
probably  would  not  go  before  the  Court  with  the  pressure 
of  a  wide-spread  public  demand  behind  it.  It  would  go 
before  the  Court  stating,  first,  that  it  is  commerce;  second, 
that  it  is  in  distress  and  confusion  and  needs  the  relief 
which  a  single  authority  alone  can  give;  third,  that  it  is 
irrationally  supervised;  fourth,  that  it  is  harassed  by  a 
multitude  of  exactions  and  requirements;  fifth,  that  it  is 
unequally  and  unjustly  taxed;  sixth,  that  its  operations 
are,  in  practice,  almost  universally  interstate  and  often 
international;  and  seventh,  that  the  governmental  regu- 
lations which  it  now  observes  have  begun  to  narrow  its 
field  of  activities,  a  condition  which,  carried  to  its  logical 
conclusion,  threatens  ultimately  to  limit  the  operations 
of  every  insurance  company  to  the  state  of  its  domicile. 

There  must  be  relief  somewhere.  The  problem  will  not 
be  solved  by  the  states.  It  cannot  be.  The  solution  lies 
in  the  commerce  clause  of  the  Constitution,  and  an  act 
of  Congress,  drawn  on  the  theory  I  have  suggested,  would 
bring  insurance  before  the  Court  in  a  proper  way.  It 
would  be  able  to  present  its  just  claims,  and  they  could  be 
argued  from  the  standpoint  of  a  powerful  precedent.  So 
presented  the  question  would  at  least  be  settled  and  insur- 
ance would  know  finally  whether  it  may  go  forward  or  not. 

I  do  not  believe,  therefore,  that  an  amendment  to  the 
Constitution  of  the  United  States  is  necessary.  I  believe 
that  insurance  is  commerce.  I  believe  the  Supreme 
Court,  which  has,  as  I  see  it,  already  said  so  by  implication, 
will  ultimately  say  so  by  definite  decree. 


FEDERAL  SUPERVISION  361 

State  supervision  of  insurance  is  not  as  logical  as  the 
union  of  the  colonies  under  the  Confederation.  The 
colonies  had  in  their  Congress  at  least  one  point  of  contact. 
There  is  no  point  of  contact  in  state  supervision,  no  com- 
mon authority. 

There  was  chaos  under  the  Confederation;  there  are 
chaotic  conditions  now  under  state  supervision.  The 
colonies  needed  a  larger,  a  stronger,  a  broader  plan.  They 
found  that  plan  in  the  Constitution.  Society  itself  presents 
much  of  the  savage  individualism  that  would  certainly 
have  destroyed  the  colonies  under  the  Confederation. 
The  rule  of  the  strong  is  the  law  of  society.  Waste,  in- 
efficiency, brutality,  selfishness,  the  lack  of  any  compre- 
hensive plan,  make  even  the  best  of  civilizations  more  or 
less  inhumane.  Society  would  like  to  be  humane,  but  it 
has  little  time  and  no  sufficient  program.  Society  has 
advanced  only  to  that  condition  of  efficiency  which  was 
exemplified  in  the  Confederation.  It  needs  a  Constitution 
which  shall  provide  a  more  perfect  Union.  Insurance  — 
fire  insurance  as  an  instrumentality  of  credit  and  traffic, 
and  life  insurance  as  a  sure  and  just  method  of  capitalizing 
human  life  —  presents  a  plan,  and,  so  far  as  it  goes,  an 
adequate  plan.  But,  like  the  Constitution,  it  operates,  if  it 
operates  effectively,  directly  on  the  citizen  and  not  on  the 
several  states.  In  other  words,  the  plan  of  insurance  — 
especially  of  life  insurance — is  the  plan  of  the  Constitution. 

Through  federal  supervision  we  seek  the  adoption  of 
this  social  constitution.  When  that  is  done,  the  chaos 
of  the  Confederation,  of  state  supervision,  will  disappear 
as  certainly  as  it  did  in  1789.  Otherwise  the  outlook  is 
not  hopeful.  Reaction  has  begun.  There  is  no  escape 
ultimately  from  one  of  two  conditions:  either  federal 
supervision,  with  an  increase  in  the  usefulness  and  the 
strength  of  insurance,  which  always  follows  a  change  from 
confused  to  sound  methods;  or,  retreat.  Retreat  means 
immeasurable  loss;  it  means  ultimate  retirement  for  every 
company  to  the  confines  of  the  state  of  its  domicile. 


362  YALE  READINGS  IN  INSURANCE 

Will  insurance  act?  Will  Congress  act?  Will  Congress 
and  the  Supreme  Court,  through  the  commerce  clause  of 
the  Constitution,  or  through  some  of  the  government's 
implied  powers,  open  the  door  to  that  larger  field  which 
the  business  alone  is  qualified  to  occupy? 

The  door  is  there.     It  has  swung  open  many  tunes. 

It  opened  and  through  it  passed  that  stately  procession 
of  commonwealths  which  has  added  thirty-three  stars 
to  the  flag. 

It  opened  and  through  it  passed  the  Monroe  doctrine. 

It  opened  and  through  it  came  the  Emancipation  Procla- 
mation. 

It  opened  and  through  it  came  a  national  currency. 

It  will  open  again  —  indeed,  it  seems  almost  ajar  now  - 
and  through  it  in  some  form  will  come  federal  supervision 
of  interstate  insurance 


CHAPTER  XXV 

NECESSITY    FOR    REFORM    OF    LIFE    INSURANCE    TAXATION  * 

LAST  year  the  life  insurance  companies  of  this  country 
paid  $12,000,000  to  the  states  as  the  share  which  the 
holders  of  life  insurance  policies  should  contribute  through 
the  companies  to  the  expenses  of  government.  A  number 
of  methods  were  used  by  the  states  in  collecting  this  amount. 
Two  millions  were  secured  by  means  of  fees  levied  primarily 
for  the  purpose  of  supporting  the  state  insurance  depart- 
ments. The  rest  was  collected  through  taxes  levied  on 
all  the  assets,  or  on  part  of  them,  and  to  a  much  greater 
extent  by  means  of  taxes  levied  upon  gross  or  net  pre- 
miums collected  by  the  companies.  The  problem  before 
us  is  to  determine  whether  this  tax  should  be  levied  on 
life  insurance,  and  if  it  should,  whether  the  ways  in  which 
the  tax  is  imposed  are  best  adapted  to  secure  justice,  as 
far  as  possible,  to  every  one  concerned. 

Much  of  the  discussion  which  has  hitherto  taken  place 
on  the  subject  of  insurance  taxation  has  not  accomplished 
much.  On  one  side  have  been  arraigned  those  favoring 
the  imposition  of  heavy  taxes  on  the  life  insurance  business, 
and  on  the  other  those  who  have  taken  the  standpoint  that 
no  taxes  on  insurance  should  be  imposed  whatever.  Now 
it  is  always  of  great  advantage  in  clearing  up  a  knotty 
problem  such  as  this  one  of  insurance  taxation  to  find  out 
as  well  as  we  can  what  are  the  motives  actuating  those 

1  By  Lester  W.  Zartman,  Assistant  Professor  of  Political  Economy 
in  Yale  University.  Reprint  of  a  speech  delivered  before  the  second 
annual  meeting  of  the  Association  of  Life  Insurance  Presidents  and 
printed  in  the  proceedings  of  that  meeting. 

363 


364  YALE  READINGS  IN   INSURANCE 

who  are  advocating  various  lines  of  action.  Let  us  find 
this  out  in  the  present  case.  In  the  first  place,  upon  what 
have  the  advocates  of  insurance  taxation  based  their 
claim  that  the  states  ought  to  levy  such  a  tax?  A  careful 
study  of  the  situation  will  reveal  four  different  reasons. 
They  are,  first:  the  belief  that  in  many  cases  some  tax 
ought  to  be  levied  on  the  insurance  business  in  order  to 
do  justice  as  between  all  the  citizens  of  the  state.  The 
ideal  of  legislators  is  to  place  taxes  so  that  they  will  bear 
equally  upon  all  citizens  of  the  state.  To  secure  this 
object,  they  have  believed  that  a  tax  ought  to  be  levied 
upon  the  insurance  business  in  some  way,  and  have  adopted 
the  present  systems  as  expedient  methods.  The  second 
reason  why  taxes  are  levied  on  insurance  is  that,  in  the  way 
in  which  they  are  imposed,  the  tax  is  easy  to  collect.  Sup- 
pose that  a  tax  placed  upon  insurance  corporations  does 
fall  ultimately  upon  the  policy-holders,  as  is  claimed  by 
insurance  experts,  the  policy-holders  do  not  know  it,  and 
if  they  do,  they  are  unaware  of  the  extent  of  the  burden. 
In  other  words,  a  tax  on  insurance  is  an  indirect  tax  and 
as  such  possesses  all  those  characteristics  which  make 
an  indirect  tax  so  pleasing  to  the  legislator  whose  tenure 
of  office  depends  upon  his  pleasing  his  constituents.  The 
third  reason  why  heavy  taxes  are  imposed  upon  insurance 
is  popular  ignorance  as  to  the  true  nature  of  level  premium 
life  insurance.  Despite  all  attempts  which  have  been 
made  towards  educating  the  people  in  life  insurance  matters, 
it  is  perhaps  not  too  much  to  say  that  ninety-five  out  of 
every  one  hundred  people,  yes,  even  more,  do  not  under- 
stand why  it  is  necessary  to  accumulate  a  reserve.  The 
public  sees  millions  of  assets  accumulating  in  the  posses- 
sion of  a  corporation.  What  more  fit  subject  for  taxation 
than  this?  The  legislator  who  may  or  may  not  know  the 
reason  why  the  reserves  are  accumulating  is  only  too 
ready  in  most  cases  to  gratify  the  popular  demand  that 
the  business  should  be  taxed.  Lastly,  the  reason  why 
heavy  taxes  are  imposed  upon  life  insurance  is  that  in 


LIFE  INSURANCE  TAXATION  365 

many  states  the  business  is  carried  on  almost  entirely  by 
foreign  corporations,  that  is,  corporations  created  by  other 
states.  In  most  of  the  states,  a  domestic  corporation  is 
none  too  popular;  the  foreign  corporation  is  an  enemy 
which  should  be  hurt,  and  especially  when  it  is  one  which 
is  supposedly  taking  millions  of  dollars  out  of  the  state 
each  year.  Such  a  corporation  in  the  popular  judgment 
should  be  heavily  taxed. 

It  is  not  maintained  that  whenever  a  tax  has  been  im- 
posed on  insurance  that  every  legislator  who  voted  for 
the  tax  was  actuated  by  all  four  of  these  motives.  Some 
have  believed  in  a  tax  for  one  reason,  some  for  another. 
My  object  has  been  simply  to  indicate  that  no  one  cause 
has  been  back  of  the  action  taken. 

Three  of  these  reasons  for  taxing  the  insurance  business 
will  be  taken  up  and  discussed.  So  far  as  the  heavy  taxes 
are  due  to  popular  ignorance  of  the  necessity  of  accumu- 
lating large  reserves  in  level  premium  life  insurance,  all 
that  can  be  done  here  is  to  urge  the  spread  of  general  edu- 
cation on  the  subject.  For  this  purpose  nothing  will  be 
more  valuable  than  the  wholesale  failure  of  fraternal  life 
insurance  which  is  bound  to  come  during  the  next  twenty 
years. 

On  the  other  hand,  those  who  have  argued  most  strongly 
against  life  insurance  taxation  have  frequently  taken  a 
wrong  point  of  view.  They  have  seen  so  clearly  wherein 
life  insurance  differs  from  any  other  business,  and  have 
felt  so  keenly  the  injustice  of  the  present  methods  of  taxa- 
tion, that  they  have  urged  that  no  taxes  whatever  should 
be  imposed  upon  the  business,  irrespective  of  the  way  in 
which  other  businesses  are  taxed,  and  irrespective  of  the 
system  of  taxation  in  general.  They  are  wrong.  The 
question  of  taxing  life  insurance  cannot  be  isolated  from 
the  problem  of  taxation  in  general.  To  have  a  system  of 
taxation,  we  must  have  a  plan  which  takes  into  considera- 
tion all  other  taxes  that  are  levied.  No  man,  however 
sound  his  judgment,  or  however  great  his  reasoning  power, 


366  YALE  READINGS  IN  INSURANCE 

can  work  out  an  equitable  system  of  taxing  the  railroads 
in  a  state  unless  he  also  knows  what  taxes  are  levied  on 
factories,  and  on  real  estate.  In  the  same  way,  a  method 
of  taxing  life  insurance  should  take  into  consideration  all 
other  taxes  that  are  levied  by  the  governing  units  having 
jurisdiction. 

Let  us  examine  the  situation.  We  have  seen  that  taxes 
have  been  collected  in  the  shape  of  fees,  in  the  shape  of 
taxes  on  assets  and  on  premium  income,  for  reasons  which 
have  been  stated.  In  the  first  place,  not  because  of  their 
importance,  but  mainly  to  get  the  subject  out  of  the  way, 
let  us  consider  the  fees  that  must  be  paid  by  life  insurance 
companies  to  maintain  the  supervisory  departments  of 
the  various  states.  From  time  to  time  during  the  past 
century,  the  states  found  it  necessary  to  establish  control 
over  various  kinds  of  businesses.  First  was  banking,  then 
followed  transportation  and  insurance.  In  most  cases, 
it  was  necessary  to  create  new  state  officials  to  exercise 
these  supervisory  functions.  In  order  that  the  burden 
upon  the  general  state  revenues  should  not  be  increased, 
it  was  usually  provided  that  the  new  officers  should  be 
supported  by  fees  collected  from  the  corporations  or  in- 
dividuals engaged  in  the  industries  supervised.  If  this 
system  of  fees  is  applied  to  banking,  transportation,  and 
other  specific  businesses,  then  it  should  be  applied  to  insur- 
ance. As  a  matter  of  fact,  the  fee  system  of  supporting 
supervising  departments  as  it  has  worked  out  has  not  been 
a  success,  and  cannot  be  defended.  It  has  resulted  in 
extravagant  supervision.  Fees  have  been  made  so  large 
that  with  the  great  increase  in  business  much  more  has 
been  obtained  than  is  necessary.  To  use  up  the  surplus, 
needless  offices  have  been  created,  with  the  result  that 
supervision  is  costing  much  more  than  is  necessary,  and 
much  more  than  it  would  have  cost  without  the  fee  system. 

We  now  come  to  a  consideration  of  the  taxes  levied  on 
life  insurance  for  the  support  of  government  in  general, 
that  is,  to  taxes  based  on  assets  and  taxes  based  on  pre- 


LIFE  INSURANCE  TAXATION  367 

miums.  In  this  problem,  as  has  been  pointed  out,  there 
are  two  distinct  questions:  first,  should  taxes  be  imposed 
at  all  upon  the  insurance  business,  and  secondly,  are  the 
present  methods  the  correct  methods?  Should  level  pre- 
mium life  insurance  be  taxed?  One  cannot  answer  this 
question  offhand.  It  all  depends  upon  what  the  system 
of  taxation  is  in  the  state  levying  the  tax.  This  makes 
the  problem  complicated,  for  the  system  of  taxation  varies 
greatly  in  different  states.  As  a  matter  of  fact,  however, 
the  system  of  taxation  in  use  in  most  of  the  states  is  the 
general  property  tax.  Under  a  general  property  tax  sys- 
tem, taxes  are  levied  on  the  value  of  property  as  a  basis, 
including  under  the  category  of  property  on  the  one  hand 
such  physical  things  as  real  estate,  railroads,  factories, 
stores,  warehouses,  and  goods,  and  on  the  other  hand  so- 
called  intangible  property,  namely,  rights  such  as  mort- 
gages, bonds,  and  stocks.  Without  at  this  moment  going 
into  a  discussion  as  to  whether  the  general  property  tax 
system  can  be  defended  or  not,  we  must  accept  it  as  the 
existing  condition  to  which  the  insurance  taxation  is  to 
be  adjusted.  Under  this  general  property  tax  system, 
when  an  individual  owns  real  estate  he  is  taxed  according 
to  the  value  of  the  real  estate  he  possesses.  Should  not 
the  insurance  company  which  owns  real  estate  also  be 
taxed?  No  one,  so  far  as  known,  has  had  the  temerity 
to  deny  that  it  should  not  be  so  taxed.  Then  proceed  one 
step  further.  When  an  individual  owns  mortgages,  bonds, 
and  stocks,  with  a  general  property  tax  law  in  force,  he 
is  taxed  upon  their  value.  When  these  are  owned  by  an 
insurance  company,  should  they  not  also  be  taxed  as  was 
real  estate  when  so  owned?  It  is  here  that  those  who 
oppose  insurance  taxation  refuse  to  follow. 

The  reasons  given  for  not  believing  in  taxing  insurance 
are  various.  One  says  that  it  is  a  tax  upon  liabilities. 
This  is  not  true.  What  the  state  is  aiming  at  is  to  get  at 
the  bonds  and  stocks  and  the  mortgages  for  purposes  of 
taxation.  These  assets  exist,  they  belong  to  somebody, 


368  YALE  READINGS  IN  INSURANCE 

they  are  subject  to  taxation.  For  the  time  being,  the 
insurance  company  is  the  owner,  and  it  is  forced  to  pay 
the  tax. 

The  chief  argument  used  by  those  opposed  to  life  insur- 
ance taxation  is  that  life  insurance  is  a  means  of  providing 
for  the  future.  A  great  deal  is  said  of  the  widow  and  orphan 
and  that  taxes  levied  upon  insurance  are  particularly 
burdensome.  As  a  matter  of  fact  all  capital  is  laid  by 
for  the  future.  A  man  does  not  in  his  own  mind  differen- 
tiate between  the  capital  which  he  spends  for  life  insurance 
and  that  which  he  invests  in  corporation  and  other  securi- 
ties. It  is  said  that  the  man  who  pays  his  money  for  level 
premium  life  insurance  does  not  come  to  use  personally  the 
capital  which  he  saves.  This  may  be  true,  but  with  sur- 
render and  loan  privileges  in  practically  all  policies  nowa- 
days, he  may  use  for  himself  the  capital  which  he  has 
saved,  and  as  a  matter  of  fact  frequently  does  so  use  it. 
At  any  rate,  the  economic  unit  to  be  considered  is  the 
family  and  not  the  individual. 

It  will  not  avail  anything  to  say  that  taxation  dimin- 
ishes the  volume  of  life  insurance.  Undoubtedly  it  does, 
but  does  not  a  tax  on  any  industry  discourage  it?  Rail- 
road transportation  is  important  to-day,  we  could  not  have 
the  modern  organization  of  society  without  it,  there  would 
be  more  railroads  if  they  were  not  taxed,  but  most  people 
believe  that  they  ought  to  be  taxed.  Banking  is  a  bene- 
ficial business,  the  bankers  would  probably  like  to  have 
their  taxes  remitted,  to  do  so  would  encourage  the  busi- 
ness, yet  we  must  tax  the  banking  business.  We  must 
have  government.  If  we  have  it  we  must  pay  for  it. 
Taxes  are  not  a  penalty  placed  upon  a  people.  The  indi- 
vidual is  a  gainer  in  so  far  as  he  can  evade  paying  any 
part  of  the  costs  of  the  government,  but  the  people  as  a 
whole  gain  because  the  taxes  are  levied  and  paid. 

All  these  arguments  against  taxing  the  insurance  busi- 
ness are  beside  the  mark.  As  a  matter  of  fact,  under  a 
general  property  tax  system  there  is  no  reason  why  level 


LIFE  INSURANCE  TAXATION  369 

premium  life  insurance  should  not  be  taxed  in  some  way. 
Property  rights  surely  exist,  as  exemplified  by  the  accu- 
mulation of  assets  by  a  level  premium  company.  The 
general  property  tax  includes  property  rights  as  taxable 
possessions.  Therefore  hi  levying  a  tax  upon  life  insur- 
ance, the  states,  so  far  as  they  are  attempting  to  bring 
insurance  taxation  into  conformity  with  the  general  prop- 
erty tax  systems,  are  justified  in  their  action. 

The  simplest  method  which  has  been  adopted  to  make 
the  insurance  tax  correspond  to  the  general  property  tax 
has  been  the  taxes  imposed  directly  upon  the  assets. 
But  a  tax  upon  assets  could  not  be  adopted  by  all  the 
states.  Successful  companies  are  located  in  a  few  states, 
the  assets  have  been  accumulated  in  the  home  office,  the 
states  from  which  much  of  them  have  been  collected  have 
not  been  able  to  get  at  these  assets,  and  so  they  have 
levied  a  tax  upon  premiums.  Notwithstanding  the  other 
arguments  which  have  been  made  in  favor  of  taxation  of 
premiums,  perhaps  the  great  underlying  reason  for  the 
almost  universal  adoption  of  the  premium  tax  and  its 
persistent  use  has  been  the  feeling  that  under  a  general 
property  tax  these  assets  ought  to  be  taxed  in  some  way. 
Why  should  they  not  be  taxed  under  a  general  property 
tax  system?  With  every  level  premium  policy  there  are 
certain  investment  features.  Level  premium  insurance 
involves  the  necessity  of  accumulating  in  the  early  years 
of  the  policy  in  order  that  the  cost  may  not  increase  in 
the  later  years.  It  is  claimed  that  it  is  the  policy-holder 
who  pays  the  tax.  That  is  true.  Why  should  he  not 
pay  it  if  the  state  in  which  he  lives  continues  in  force  the 
absurd,  mediaeval,  general  property  tax.  Take  a  con- 
crete example.  Consider  two  men,  A  and  B.  Each  has 
$500  of  income  yearly  with  which  he  wishes  to  provide 
for  the  future.  A  buys  a  natural  premium  life  insurance 
policy  for  $10,000  at  an  initial  cost  of  $120.  The  remainder 
he  uses  to  purchase  bonds.  B  buys  a  20-year  endowment 
policy  of  $10,000  from  an  insurance  company  for  $500 


370  YALE  READINGS  IN  INSURANCE 

annual  premium.  The  company  uses  $120  of  the  premium 
at  the  start  to  pay  the  current  death  losses,  and  invests 
the  rest  in  precisely  the  same  kind  of  bonds  which  A  pur- 
chases. Under  a  general  property  tax  A  is  taxed  upon 
his  investment  in  bonds.  Under  the  same  system  of  taxa- 
tion should  not  B  also  be  taxed  upon  the  bonds  which  he 
has  purchased  through  the  medium  of  the  company?  If 
the  tax  burden  is  to  be  borne  according  to  ability  to  pay 
and  ability  to  pay  measured  by  what  a  man  is  worth, 
both  A  and  B  should  be  taxed  alike. 

This  is  the  answer  to  the  question,  Should  life  insurance 
be  taxed?  The  answer  is  yes,  if  we  are  to  continue  levy- 
ing a  general  property  tax,  including  under  it,  as  taxable 
objects,  mortgages,  bonds,  stocks,  and  similar  property 
rights. 

But  it  does  not  follow  from  this  that  the  ways  in  which 
the  states  have  levied  the  tax  upon  the  business  have  been 
just  or  practical.  Neither  the  tax  on  assets  nor  the  tax 
on  premiums  can  be  justified.  The  state  in  which  a  com- 
pany is  located  does  not  have  the  moral  right  to  levy  a 
general  property  tax  upon  all  the  assets  of  such  companies 
as  happen  to  have  their  home  offices  in  that  state.  No 
successful  insurance  company  has  gathered  its  assets 
even  for  the  most  part  from  the  savings  of  citizens  within 
the  state  where  it  is  located.  Its  assets  are  the  result  of 
premiums  that  it  has  collected  from  every  part  of  the 
country.  These  assets  belong  in  large  part  to  citizens  of 
other  states.  A  life  insurance  company  from  the  stand- 
point of  taxation  is  to  be  compared  to  a  trust  company 
or  a  savings  bank.  The  assets  which  it  possesses  are  de- 
posited for  the  time  being  in  the  home  office  by  the  policy- 
holders,  to  be  held  until  the  policies  mature.  Few  state 
legislatures  have  gone  to  the  extent  of  taxing  a  trust  com- 
pany or  a  savings  bank  upon  its  deposits.  Why  then 
should  they  levy  a  tax  upon  the  deposits  in  a  life  insur- 
ance company?  There  would  be  more  justice  in  a  state 
taxing  its  trust  companies  upon  their  deposits,  than  taxing 


LIFE  INSURANCE  TAXATION  371 

an  insurance  company  upon  its  deposits,  since  trust  com- 
panies are  more  local  in  their  activities.  Most  of  the 
deposits  of  a  trust  company  belong  to  citizens  of  the  state 
in  which  it  is  located.  To  levy  a  tax  upon  its  deposits 
could  be  justified  on  the  ground  of  expediency  in  the 
collection  of  the  tax.  Yet  few  states  have  taxed  such 
deposits.  How  much  more  then  should  they  not  tax  the 
insurance  company  upon  its  assets  which  do  not  belong 
to  citizens  of  that  state?  Whatever  rights  a  state  may 
have  in  regard  to  the  share  of  the  assets  belonging  to  its 
own  citizens,  it  does  not  have  the  same  right  over  assets 
belonging  to  citizens  of  other  states.  With  but  few  notable 
exceptions,  the  states  have  realized  this  and  have  aban- 
doned the  tax  on  assets. 

Neither  does  it  follow  from  the  fact  that  under  a  general 
property  tax  system  insurance  ought  to  be  taxed  that  the 
states  should  levy  a  tax  upon  premiums.  A  lax  levied 
on  premiums  can  be  defended  on  one  ground  only,  that  of 
expediency.  It  is  an  easy  tax  to  collect  and  this  is  a  great 
consideration  in  the  mind  of  the  administrator.  But  the 
system  of  taxing  insurance  by  levying  on  premiums  is 
an  illogical  method,  the  application  of  which  leads  to  three 
classes  of  discriminations: 

1.  Discrimination    between   policy-holders   of   different 
states. 

2.  Discrimination   between  different  classes  of  policy- 
holders  in  the  same  state. 

3.  Discrimination  between  policy-holders  and  non-policy- 
holders. 

Before  discussing  these  discriminations  it  is  well  that 
we  should  understand  in  unmistakable  language  who  pays 
the  tax  on  life  insurance.  Undoubtedly  it  is  the  policy- 
holder.  This  fact  is  so  well  understood  by  those  who 
know  the  nature  of  life  insurance  that  no  attention  would 
need  be  given  it,  if  there  were  not  so  many  who  do  not 
understand  the  theory  of  level  premium  life  insurance. 
To-day  level  premium  life  insurance  is  sold  in  two  ways: 


372  YALE  READINGS  IN  INSURANCE 

by  means  of  participating  policies,  and  by  means  of  non- 
participating  policies.  In  participating  insurance,  insur- 
ance is  secured  at  absolute  cost.  Whatever  increases  that 
cost  increases  the  expense  of  insurance  to  the  policy- 
holders.  Taxes  increase  the  cost  of  insurance  by  even 
more  than  the  amount  of  the  tax,  therefore  they  increase 
the  expense  of  insurance  to  the  holders  of  participating 
policies.  Most  policies  are  of  the  participating  kind,  but 
it  can  be  shown  in  precisely  the  same  way  that  the 
holder  of  the  non-participating  policy  also  pays  the  tax 
on  insurance.  The  non-participating  policies  are  sold  at  a 
fixed  rate.  This  rate  must  be  high  enough  to  cover  all 
the  costs  to  the  company  selling  such  a  policy  and  leave 
a  margin  for  profit.  The  margin  of  profit  must  remain. 
In  every  business  where  capital  is  invested  there  must  be 
some  profit,  or  capital  will  leave  that  industry.  This  is 
true  of  non-participating  insurance.  If  the  cost  of  fur- 
nishing insurance  be  increased,  the  price  to  the  man  who 
wants  it  must  be  increased.  Decrease  the  cost  and  com- 
petition between  the  companies  will  reduce  the  price  to 
the  policy-holder.  A  tax  is  one  of  the  costs.  An  increase 
in  it  means  higher  prices  for  insurance.  A  decrease  means 
lower  prices.  Thus  it  is  that  no  matter  how  life  insurance 
is  sold,  the  tax  upon  the  business  is  borne  by  the  policy- 
holders. 

Having  established  the  fact  that  taxes  on  premiums 
are  ultimately  paid  by  the  policy-holders,  we  are  now 
ready  to  discuss  the  discriminations  due  to  the  present 
method  of  imposing  taxes  on  premiums.  The  first  class 
of  discriminations  resulting  from  taxes  levied  on  premiums 
is  due  to  the  fact  that  some  states  levy  much  heavier 
premium  taxes  than  other  states.  Five  state  legislatures 
have  thought  that  a  tax  of  1  per  cent,  upon  gross  premiums 
is  the  right  amount  in  order  to  equalize  the  burden  of 
taxation  as  between  policy-holders  and  non-policy-holders 
in  their  states.  Six  other  states  have  thought  that  2£  per 
cent,  is  necessary  to  make  the  burden  equal  as  between  its 


LIFE  INSURANCE  TAXATION  373 

citizens  holding  policies,  and  those  not  holding  policies. 
But  how  does  such  a  tax  work  out  as  between  policy- 
holders  of  different  states?  A  life  insurance  company  does 
not,  it  should  not,  confine  its  activities  to  one  state.  To 
do  so  would  be  bad  for  the  citizens  of  every  state.  To 
do  business  on  such  a  small  scale  would  increase  the  ex- 
pense of  insurance,  and  it  would  not  allow  the  companies 
to  obtain  that  wide  distribution  of  risks  which  is  absolutely 
essential  to  safety.  Therefore  we  find  an  insurance  com- 
pany doing  business  in  a  large  number  of  states,  paying 
taxes  of  |  per  cent,  in  one  state  for  its  policy-holders  upon 
their  premiums  and  2  per  cent,  in  others.  In  theory  life 
insurance  ought  to  cost  more  in  a  state  levying  a  tax  of 
3  per  cent,  on  premiums  than  in  a  state  levying  only  1 
per  cent.  It  does  not.  Why?  Because  the  companies 
cannot  split  up  their  business  into  forty-eight  units  and 
treat  each  one  independently,  giving  the  policy-holders  in 
each  their  just  deserts.  The  practical  difficulties  of  such  a 
course  of  action  are  insuperable.  It  would  require  the  uni- 
form action  of  all  companies  in  placing  the  burden  of  taxa- 
tion upon  the  policy-holders  of  a  specific  state,  and  such 
uniform  action  is  impossible.  The  business  is  too  intensely 
competitive  to  allow  of  uniform  action  in  such  a  matter 
vitally  affecting  the  policy-holders.  Even  if  the  com- 
panies could  once  agree,  they  would  not  be  able  to  prevent 
this  first  class  of  discriminations,  as  the  states  levying 
the  high  taxes  would  in  all  probability  pass  legislation 
prohibiting  such  action.  Therefore  notwithstanding  the 
higher  tax  in  one  state  than  in  another,  life  insurance  costs 
the  same  in  all.  The  companies  accept  the  tax  as  one  of 
the  general  costs  of  the  business  and  apportion  it  upon 
all  policy-holders  equally.  The  result  is  that  premium 
taxes  as  they  are  levied  to-day,  high  in  one  state,  and  low 
in  another,  force  policy-holders  in  one  state  to  help  bear 
the  burdens  of  government  in  another  state.  Such  a 
condition  of  affairs  is  repugnant  to  our  sense  of  justice. 
In  the  second  place,  a  tax  on  premiums  discriminates 


374  YALE  READINGS  IN  INSURANCE 

and  is  unfair  in  that  it  does  not  bear  equally  upon  all 
policy-holders.  The  theory  of  the  general  property  tax 
is  that  it  is  levied  on  individuals  according  to  their  ability 
to  pay,  ability  to  pay  being  measured  according  to  the 
value  of  their  property  interests.  A  tax  of  a  fixed  per- 
centage each  year  upon  the  level  life  insurance  premium 
is  a  tax  levied  upon  the  individual  irrespective  of  his 
ability  to  pay.  The  policy-holder  who  pays  $120  as  the 
second  renewal  premium  on  a  20-year  term  policy,  on 
which  a  tax  of  2  per  cent,  is  levied,  is  really  paying  a  tax 
of  10  per  cent,  upon  the  value  of  the  equity  which  he 
possesses,  while  the  man  who  is  paying  in  his  twentieth 
renewal  premium  of  $500  on  an  endowment  policy,  and 
is  taxed  $10,  is  taxed  at  the  rate  of  only  a  fraction  of 
1  per  cent,  upon  the  equity  which  he  possesses.  A  tax 
levied  in  such  a  way  is  unjust  and  unfair. 

The  third  way  in  which  taxes  as  they  are  now  levied 
on  life  insurance  are  unjust  is  that  they  discriminate 
between  policy-holders  and  non-policy-holders  in  the  state 
levying  the  tax.  It  has  been  urged  in  this  paper  that 
under  a  system  of  taxation  based  upon  the  general  property 
tax  insurance  ought  to  be  taxed.  This  is  true.  But 
whenever  a  modification  is  made  in  the  general  property 
tax  affecting  non-policy-holders,  a  modification  should 
likewise  be  made  in  the  tax  upon  holders  of  life  insurance 
contracts.  This  has  not  been  done.  In  all  but  four  states, 
if  a  citizen  of  a  state  buys  shares  of  stock  in  a  corporation 
created  by  that  state,  he  is  exempted  from  the  general 
property  tax  upon  those  shares.  If  another  citizen  of  the 
same  state,  instead  of  buying  the  shares  directly,  buys 
life  insurance,  and  the  company  purchases  the  same  shares 
of  stock,  no  exemption  is  made  in  the  tax  which  the  com- 
pany directly,  and  the  policy-holder  indirectly,  pays  to 
the  state.  If  an  exemption  should  be  made  in  one  case, 
it  should  be  made  in  the  other.  It  is  not,  and  in  this  way 
the  policy-holders  are  discriminated  against. 

Besides  resulting  in  discriminations  as  just  described, 


LIFE  INSURANCE  TAXATION  375 

a  tax  upon  premiums  is  illogical,  that  is,  if  the  tax  is 
collected  by  the  state  from  the  companies.  If  a  state 
decides  that  premiums  must  be  taxed,  it  does  not  follow 
that  it  has  a  right  to  collect  the  tax  from  the  insurance 
companies.  The  companies  have  a  fixed  contract  with 
their  policy-holders.  The  annual  premium  is  determined 
when  the  contract  is  made  by  the  company,  and  the  state 
insists  that  this  premium  must  not  be  increased  no  matter 
how  urgent  are  the  needs  of  the  company.  When  a  state 
levies  a  tax  upon  premiums,  the  life  insurance  company 
cannot  return  the  reserve  upon  its  policies  in  that  state  to 
the  policy-holders,  thus  terminating  its  contracts,  and  in 
this  way  avoiding  the  tax.  The  state  demands  that  the 
contracts  be  carried  out  to  the  stipulated  time  and  for 
the  amounts  previously  agreed  upon.  At  the  same  time, 
the  state  assumes  the  right  to  exact  payments  from  the 
companies  which  may  imperil  their  ability  to  carry  out 
their  contracts.  To  say  that  the  states  probably  will  not 
levy  such  a  burdensome  tax  is  not  meeting  the  objection. 
The  right  to  levy  a  tax  involves  the  right  to  levy  a  heavier 
one.  The  situation  is  illogical.  The  state  cannot  con- 
sistently rule  that  the  contract  must  be  a  fixed  contract, 
and  at  the  same  time  make  it  impossible  for  the  com- 
panies to  carry  out  their  contracts. 

The  conclusion  then  is  that  even  under  a  general  prop- 
erty tax  system  the  tax  on  life  insurance  premiums  can- 
not be  defended.  It  is  unfair  as  between  citizens  of  the 
same  state,  unfair  as  between  different  classes  of  policy- 
holders,  unfair  as  between  insurers  and  non-insurers,  and 
essentially  illogical. 

Two  things  can  be  done:  first,  abolish  the  general 
property  tax  or  modify  it  in  such  a  way  as  to  abolish  its 
offensive  features,  or  secondly,  if  this  cannot  be  done,  to 
levy  a  tax  on  life  insurance  in  such  a  way  as  to  make  it 
fit  in  properly  with  the  general  property  tax  as  it  now  ex- 
ists. The  better  solution  would  be  the  first.  The  general 
property  tax  system  must  sooner  or  later  be  abolished. 


376  YALE  READINGS  IN  INSURANCE 

Its  faults  are  so  evident,  its  injustices  are  so  burdensome, 
that  a  radical  change  must  be  made.  If  the  system  is  to 
be  continued  in  its  main  features,  at  least  a  careful  dis- 
tinction must  be  made  in  the  objects  which  are  subject 
to  the  tax.  Most  of  the  difficulties  in  our  system  of  taxa- 
tion are  due  to  the  confusion  which  exists  in  the  minds  of 
men  between  wealth  and  the  right  to  the  use  of  wealth. 
Suppose  a  man  owns  a  farm  worth  $10,000.  The  farm  is 
wealth  and  as  such  it  is  subject  to  taxation.  The  deed 
which  he  possesses  is  an  evidence  of  the  right  of  ownership 
in  that  wealth.  No  state  taxes  deeds  to  real  estate.  Let 
us  assume  further  that  there  is  another  man  in  the  com- 
munity who  has  no  wealth.  The  assessor  on  making  his 
annual  inspection  finds  that  these  two  men  together  pos- 
sess wealth  valued  at  $10,000.  During  the  year  the  first 
man  sells  his  farm  to  the  other  for  $10,000,  taking  a  mort- 
gage upon  the  farm  for  the  full  amount.  This  year  the 
assessor  finds  one  man  the  legal  owner  of  land  valued  at 
$10,000  and  the  other  the  owner  of  a  mortgage  for  the 
same  amount.  Instead  of  finding  $10,000  worth  of  tax- 
able value,  he  finds  $20,000.  Has  the  wealth  of  the  two 
men  increased?  Is  the  ability  of  the  two  increased  doubly? 
If  it  has,  what  an  easy  thing  it  would  be  for  a  community 
to  grow  rich.  But  no  new  wealth  has  been  created.  No 
greater  ability  to  pay  exists  than  existed  before.  Yet 
practically  all  our  sovereign  states  act  on  the  assumption 
that  there  has  been  a  change,  and  tax  the  mortgage  as 
well  as  the  real  estate.  Two  taxes  are  paid  where  one 
was  paid  before.  This  is  wrong.  It  is  double  taxation  and 
as  such  is  unjust. 

The  same  condition  exists  in  the  taxation  of  corporations 
and  corporation  securities.  If  a  man  lives  in  one  state 
and  owns  an  unincorporated  enterprise  in  an  adjoining 
state,  he  is  taxed  only  in  the  state  where  the  factory  or 
mine  or  other  enterprise  is  located.  Let  him  incorporate  it, 
and  issue  the  shares  of  stock  to  himself  in  place  of  the  old 
deed  to  the  wealth,  and  he  will  not  only  pay  the  same  or 


LIFE  INSURANCE  TAXATION  377 

a  larger  tax  upon  the  wealth  of  the  corporation  in  the  state 
where  it  is  located,  but  he  will  also  now  pay  a  tax  upon  the 
same  value  in  the  state  where  he  lives,  because  shares  of 
capital  stock  are  subject  to  taxation.  Has  his  ability  to 
bear  the  burden  of  taxation  increased?  Is  he  wealthier 
than  before?  Not  at  all.  He  is  simply  the  victim  of 
double  taxation. 

What  is  the  remedy?  Let  the  states  give  up  the  plan 
of  taxing  wealth  and  at  the  same  time  evidences  of  owner- 
ship in  that  wealth.  It  is  seriously  unjust  and  has  the 
baneful  immoral  effect  of  making  men  dishonest  in  their 
relations  with  the  government.  Give  up  taxing  one  thing 
or  the  other.  From  the  theoretical  standpoint  it  makes 
little  difference  which  one,  wealth  or  evidences  of  owner- 
ship in  wealth.  From  the  practical  standpoint,  wealth 
as  the  concrete,  physical  thing  should  be  taken  as  the  basis. 
Since  it  is  physical,  and  therefore  can  be  seen  and  found, 
it  would  simplify  the  problem  to  take  wealth,  meaning  by 
that  term  the  material  objects,  as  the  basis  of  taxation. 
In  no  other  way  can  the  injustices  of  the  present  methods 
as  easily  be  abolished. 

What  would  be  the  effect  of  this  upon  insurance  taxa- 
tion? It  would  mean  that  an  insurance  company  would 
be  taxed  upon  its  real  estate  and  that  alone.  The  bonds, 
stocks,  mortgages,  notes,  all  these  are  evidences  of  owner- 
ship and  hence  would  not  be  taxed.  Why  should  they? 
The  corporation  which  issues  them  is  already  taxed,  and 
they  should  not  be  taxed  twice.  Neither  under  this  sys- 
tem would  the  policy-holders  be  taxed  in  the  way  they 
are  now.  Their  equity  in  the  assets  is  a  right  to  bonds 
and  stocks  and  mortgages,  and  these,  as  we  have  seen, 
would  not  be  taxed. 

To  levy  all  taxes  on  wealth  exempting  property  rights 
would  be  a  real  solution  of  the  problem  of  taxation.  But 
like  most  good  solutions  it  may  be  difficult  to  accomplish. 
How  about  compromise  measures?  Cannot  a  system  be 
devised  for  taxing  life  insurance  which  can  be  grafted  on 


378  YALE  READINGS  IN  INSURANCE 

to  present  systems  of  taxation,  and  thus  not  involve  such 
a  wide-spread  change?  Such  a  method  of  taxation  can  be 
devised.  What  I  have  to  suggest  is  that  the  states  give 
up  their  taxes  on  assets  and  taxes  on  premiums,  and  make 
the  policy-holder  liable  for  taxation  upon  the  reserve 
value  of  his  policy.  This  method  would  fit  in  well  with 
a  general  property  tax.  With  the  modern  policy,  the  re- 
serve upon  a  policy  is  always  at  the  disposal  of  the  policy- 
holder.  He  can  borrow  from  it  and  he  can  withdraw  it 
if  he  cares  to  do  so.  In  what  essential  way  does  the 
reserve  upon  a  policy  nowadays  vary  from  the  deposit 
placed  in  a  trust  company?  That  the  insurance  com- 
pany so  far  as  it  is  the  holder  of  assets  has  always  been 
considered  simply  as  the  trustee  of  the  policy-holders' 
funds  is  amply  demonstrated  by  a  study  of  insurance  litera- 
ture. Most  states  do  not  tax  trust  companies  upon  their 
deposits,  but  they  do  tax  the  depositor  upon  the  amount 
of  his  deposit.  If  the  states  are  going  to  levy  a  general 
property  tax  and  under  this  tax  life  insurance,  the  tax 
which  they  should  impose  is  a  tax  upon  the  individual 
policy-holder  according  to  the  value  of  his  deposit  or 
reserve  with  the  company. 

Why  should  not  the  tax,  if  it  is  to  be  imposed  at  all,  be 
imposed  in  this  way?  Any  unprejudiced  man  can  be  shown 
hi  a  few  minutes'  time  that  it  is  the  policy-holder  who  pays 
the  tax  under  the  present  system.  This  is  so  easy  of 
demonstration  that  it  would  be  a  waste  of  time  to  make 
the  assertion  if  it  were  not  the  fact  that  many  legislators 
have  not  realized  it  as  the  true  situation.  The  policy- 
holder  pays  the  tax  but  he  pays  it  indirectly,  and  thus 
does  not  know  how  much  he  is  paying.  If  the  truth  were 
known,  it  would  probably  show  that  the  policy-holder  is 
in  general  paying  a  heavier  tax  than  is  the  average  holder 
of  personal  property.  Furthermore,  the  tax  is  grossly 
ill-proportioned,  amounting  to  from  10  to  15  per  cent, 
upon  the  value  of  the  equity  which  the  policy-holder  pos- 
sesses in  the  early  years  of  the  policy.  This  is  wrong.  We 


LIFE  INSURANCE  TAXATION  379 

may  not  believe  that  the  investor  in  life  insurance  should 
receive  any  special  consideration,  but  we  should  insist 
with  all  our  power  that  no  extra  burden  shall  be  placed 
upon  him. 

How  should  such  a  general  property  tax  as  has  been 
suggested  be  levied  upon  life  insurance?  That  is  a  prac- 
tical question  for  the  practical  statesman  to  solve.  Two 
methods  may  be  suggested.  First,  make  the  reserve  value 
subject  to  local  assessment  just  as  is  an  investment  out- 
right in  securities,  or  a  deposit  in  a  trust  company  is  made 
subject  to  local  taxation.  The  objection  to  this  plan  is 
that  it  would  result  in  much  evasion.  Of  course  it  would. 
But  if  the  states  are  going  to  hold  on  to  the  general  prop- 
erty tax  system  with  all  its  evasions  and  its  glaring  irregu- 
larities, it  is  perhaps  but  fair  that  the  man  who  invests  in 
life  insurance  should  have  the  same  privilege  of  evading 
the  tax  upon  his  insurance  reserve.  This  would  be  taking 
a  step  in  the  wrong  direction  for  tax  reform,  but  if  justice 
cannot  be  done  in  any  other  way,  it  is  justice  that  all  shall 
have  an  equal  chance. 

The  other  method  would  be  to  retain  the  insurance  tax 
as  a  state  tax,  and  have  the  companies  hand  in  to  the 
state  board  of  tax  commissioners  a  list  of  all  policy-holders 
in  the  state,  with  the  values  of  their  reserves.  Upon  these 
values  the  state  could  impose  a  fair  tax  to  be  collected 
directly  from  the  individual  policy-holders.  This  would 
do  away  with  the  evasion  resulting  from  local  taxation. 

What  results  would  be  obtained  if  these  suggestions 
were  carried  out?  It  would  result  in  justice  as  between 
the  policy-holders  of  various  states.  It  is  absolutely 
wrong  that  the  policy-holders  of  one  state  should  be  taxed 
to  support  the  government  of  another  state  as  is  done  at 
the  present  time,  and  will  continue  to  be  done  if  the  method 
of  taxing  assets  and  premiums  is  continued.  The  plan 
would  secure  justice  as  between  individual  policy-holders, 
something  equally  to  be  desired.  Lastly,  it  would  result 
in  equalization  of  the  rates  of  taxation  between  purchasers 


380  YALE  READINGS  IN  INSURANCE 

of  insurance  and  other  taxpayers.  The  policy-holder 
pays  too  much  to-day.  He  does  not  object  because  he 
does  not  know  how  much  he  is  paying.  Follow  the  plan 
here  suggested.  Substitute  a  direct  tax  for  an  indirect 
tax  and  we  can  safely  leave  it  to  the  intelligent  body  of 
policy-holders  to  look  after  their  own  interests. 

Is  it  possible  to  secure  this  reform  in  life  insurance,  a 
reform  which  would  do  away  with  discriminations  between 
policy-holders  of  different  states,  between  different  classes 
of  policy-holders  in  the  same  state,  and  between  policy- 
holders  and  non-insurers?  Some  say  not.  They  urge 
that  for  a  legislator  to  substitute  a  direct  tax  for  an  in- 
direct one  would  sound  his  political  death  knell.  It  is 
to  be  hoped  that  it  would  not;  that  if  such  a  measure 
were  carefully  explained  to  the  public,  that  public  opinion 
would  be  intelligent  enough  to  appreciate  the  situation. 

But  if  this  compromise  reform,  a  reform  which  means 
simply  the  substitution  of  a  direct  tax  for  an  indirect  tax, 
involves  such  a  radical  change  in  the  existing  system  of 
taxation  that  it  stands  no  chance  of  being  adopted,  shall 
we  advocate  no  reform  whatever  in  insurance  taxation? 
No,  if  we  cannot  get  a  reform  which  will  eliminate  all  three 
classes  of  discrimination  resulting  from  the  premium  tax, 
let  us  get  a  reform  which  will  eliminate  one  of  the  discrimi- 
nations. There  is  one  class  of  discriminations  which  has 
been  discussed  which  the  policy-holders  have  more  than 
the  right  to  ask  the  states  to  eliminate.  They  have  the 
right  to  demand  that  it  should  be  eliminated.  Reference 
is  made  to  the  discrimination  between  policy-holders  of 
different  states  caused  by  one  state  levying  a  tax  rate  of 
2  or  3  per  cent,  upon  premiums  while  other  states  impose 
less  than  1  per  cent.  Discrimination  of  this  sort  can  be 
eliminated  by  all  the  states  levying  as  nearly  as  possible 
a  uniform  rate  of  premium  taxation  upon  all  the  com- 
panies. 

Uniformity  among  the  states  can  be  secured  in  two  ways, 
by  the  states  with  a  low  rate  increasing  their  rates  to  the 


LIFE  INSURANCE  TAXATION  381 

level  of  the  high-rate  states,  or  by  the  high-rate  states 
lowering  their  rates.  It  is  much  to  be  desired  that  uni- 
formity should  be  obtained  through  the  decrease  in  rates 
by  the  high  states.  It  would  be  a  move  in  the  right 
direction.  Since  some  reform  is  better  than  none,  and 
since  it  does  seem  possible  at  this  time  to  secure  this 
much,  if  nothing  further  can  be  secured,  let  us  at  least 
secure  uniformity  of  rates  of  taxation  upon  life  insurance 
in  the  various  states. 

A  brief  summary  of  this  extended  discussion  may  not 
be  out  of  place.    It  has  been  maintained: 

1.  That  under  the  existing  general  property  tax  system 
in  force  in  most  of  the  states,  some  tax  ought  to  be  levied 
on  life  insurance. 

2.  That  present  methods  of  taxing  insurance  are  unjust. 

3.  That  the  best  remedy  would  be  for  the  states  to 
abolish  the  general  property  tax,  or  at  least  to  amend  it 
in  such  a  way  as  to  include  only  tangible  wealth  as  sub- 
ject to  taxation. 

4.  That  if  the  general  property  tax  cannot  be  abolished, 
substitute  for  the  indirect  tax  upon  the  policy-holders  a 
direct  tax  upon  them,  making  the  reserve  values  of  policies 
subject  to  taxation,  not  to  the  company,  but  to  the  policy- 
holders  directly. 

5.  That  if  no  other  reform  can  be  secured,  the  policy- 
holders  have  a  right  to  demand  uniform  rates  of  taxation 
by  the  various  states,  uniformity  being  secured  generally 
by  a  reduction  in  the  rates  of  the  high-tax  states. 


CHAPTER  XXVI 

INDUSTRIAL   INSURANCE  l 

INDUSTRIAL  insurance  is  of  comparatively  modern 
origin  in  this  country.  All  forms  of  life  insurance  are  the 
result  of  slow  development  in  theory  and  practice,  but  for 
industrial  insurance  it  may  be  claimed  that  it  is  the  out- 
growth of  ages  of  experiments  to  provide,  by  an  effective 
and  absolutely  certain  method,  for  the  most  simple  needs 
of  the  mass  of  the  population  at  the  hour  of  death.  The 
mass  of  the  people  are  confronted  by  the  fact  that  death 
means  a  large  expense,  usually  a  burdensome  debt,  to  meet 
the  cost  of  burial,  or  a  heavy  draft  on  slender  savings,  the 
result  of  years  of  abstinence  and  foresight,  or  the  alterna- 
tive of  state  or  private  charity.  However  remote  the 
chance  of  death  may  appear  at  times,  it  is  an  ever-present 
contingency,  for  which  an  effective  provision  has  become 
a  necessity  of  civilized  life. 

Industrial  insurance  is  so  called  because  the  system  is 
primarily  designed  to  meet  the  needs  of  wage-earners 
employed  in  manufacturing  industries,  and  the  weekly 
premium  payments  coincide  with  the  weekly  payment 
of  wages  and  salaries.  The  premiums  are  from  five  cents 
to  seventy  cents  a  week.  The  system  provides  for  family 
insurance  on  a  comprehensive  plan,  and  every  member 
of  the  family  at  ages  one  to  seventy,  if  in  good  health,  is 
insurable.  The  weekly  premiums  for  a  family  of  five 
average  about  thirty-five  or  forty  cents,  being  respectively 

1  By  John  F.  Dryden,  President  of  the  Prudential  Insurance  Com- 
pany, Newark.  Reprinted  from  pages  184-199  of  the  "  Yale  Insurance 
Lectures,  Life." 

382 


INDUSTRIAL  INSURANCE  383 

ten  cents  each  for  the  father  and  mother  and  five  cents 
each  for  the  children.  The  amounts  of  insurance  vary  with 
age,  but  average  about  one  hundred  and  fifteen  dollars. 
For  children  under  ten  the  average  is  thirty  dollars, 
and  for  persons  over  age  ten  one  hundred  and  fifty 
dollars.  The  system  is  sufficiently  elastic  to  meet  the 
needs  of  the  most  humble  laborer,  even  though  advanced 
in  years,  as  well  as  the  requirements  of  the  more  prosperous 
mechanic  or  skilled  workman,  able  to  pay  premiums  for 
enough  insurance  to  provide  for  more  than  the  immediate 
needs  of  his  family  after  his  death.  The  premiums  are 
collected  weekly  from  the  houses  of  the  insured  by  author- 
ized agents,  who  also  solicit  for  new  insurance.  While 
the  collection  of  weekly  premiums  necessarily  increases  the 
cost  of  insurance,  the  difference  is  relatively  small  when 
the  convenience  of  this  method  is  taken  into  account. 
Attempts,  especially  by  the  British  government,  to  trans- 
act a  weekly  payment  system  of  life  insurance  without 
collectors  have  failed.  Attempts  to  transact  a  life  insur- 
ance business  on  the  monthly  payment  plan  have  not  been 
successful  on  any  considerable  scale.  These  are  the 
simple  elements  of  a  business  which  has  grown  to  immense 
proportions  during  the  thirty-four  years  since  The  Pru- 
dential Insurance  Company  of  America  was  organized,  in 
1875,  as  the  first  American  company  to  transact  this  form 
of  life  insurance  in  this  country. 

Industrial  insurance  had  its  origin  in  England,  and  the 
evolution  of  the  business  can  be  traced  backwards  by  an 
unbroken  record  through  friendly  societies  and  burial 
clubs  to  the  trade  and  craft  guilds  of  the  fifteenth  cen- 
tury. The  development  was  the  inevitable  result  of 
economic  laws  making  for  a  higher  degree  of  efficiency  and 
security  in  social  institutions.  This  is  not  the  place,  how- 
ever, to  go  into  the  history  of  these  interesting  associations 
for  social  betterment  under  different  conditions  of  life. 
They  served  their  purpose  at  the  time,  but  they  would  ill 
meet  the  conditions  of  the  present. 


384  YALE  READINGS  IN  INSURANCE 

In  1853  a  comprehensive  investigation  was  made  by  a 
parliamentary  committee  into  the  practice  of  life  insurance 
companies  in  England,  and  among  other  conclusions  the 
committee  advanced  the  view  that  "the  ground  hitherto 
occupied  by  these  useful  institutions  (life  insurance  asso- 
ciations) has  been  comparatively  limited,  and  that  their 
application  is  capable  of  a  great  extension  not  only  in  the 
higher  and  middle  classes  of  society,  but  also  among  the 
humbler  classes,  to  whom  it  has  recently  been  very  con- 
siderably applied." 

Acting  on  this  suggestion,  The  Prudential  of  London, 
organized  as  an  ordinary  life  insurance  company  in  1848, 
made  inquiries  and  ascertained  that  almost  without 
exception  the  then  existing  so-called  friendly  societies 
and  burial  clubs  were  in  an  unsound  financial  condition, 
while  many  indeed  had  failed  with  disastrous  results  to  the 
people  they  were  supposed  to  benefit.  A  modest  attempt 
had  been  made  to  transact  the  business  of  life  insurance 
for  wage-earners  on  a  commercial  basis,  but  the  results 
had  not  been  very  encouraging.  The  Prudential,  however, 
realized  the  immense  opportunity  to  extend  the  principles 
of  life  insurance  to  the  broad  field  of  workingmen's  insur- 
ance in  general.  On  the  recommendation  of  the  best 
available  actuarial  talent,  required  for  the  construction  of 
tables  and  plans,  and  after  purchasing  the  existing  business 
of  a  few  small  companies,  The  Prudential,  in  1854,  com- 
menced the  business  of  industrial  insurance,  destined  to 
make  it  the  foremost  life  insurance  company  in  the  world. 

During  the  fifty  years  which  have  passed  since  the  intro- 
duction of  industrial  insurance  the  business  has  been  ex- 
tended to  almost  all  civilized  countries  with  more  or  less 
success,  but  the  development  has  been  the  greatest  hi 
English-speaking  countries,  and  there  are  now  more  than 
forty  millions  of  industrial  policies  in  force  in  the  world. 
Of  this  number  over  one-half  are  in  force  in  the  United 
Kingdom,  about  four  millions  in  Germany,  and  not  far 
from  one-half  a  million  in  Australia. 


INDUSTRIAL  INSURANCE  385 

There  are  now  in  force  in  this  country  almost  fifteen 
million  industrial  policies,  or,  with  five  persons  to  a  family, 
it  would  appear  that  about  three  million  families  in  the 
United  States  are  insured  with  industrial  companies  for 
sums  which  range  from  $15  to  $1000.  When  we  take 
into  consideration  the  fact  that  there  are  about  fifteen 
million  families,  we  have  it  that  at  present  about  one 
family  out  of  every  five  is  financially  interested  in  the  suc- 
cess and  future  of  this  form  of  life  insurance  in  the  United 
States.  When  we  further  consider  the  fact  that  the  total 
number  of  savings  banks  depositors  is  only  about  seven 
millions,  although  we  have  had  savings  banks  since  the 
beginning  of  the  nineteenth  century,  and  industrial  insur- 
ance for  only  a  little  more  than  one-fourth  of  that  period, 
you  will  agree  that  industrial  insurance  is  a  social  institu- 
tion of  great  magnitude. 

The  office  practice  of  industrial  insurance  is  in  a  general 
way  almost  identical  with  the  practice  of  an  ordinary 
company,  using  that  term  in  a  technical  way,  and  nearly 
all  of  the  industrial  companies  transact,  in  fact,  an  or- 
dinary business  as  a  complement  to  their  particular  system 
of  family  insurance  on  the  weekly  premium  payment  plan. 
The  essential  points  of  difference  arise  out  of  the  vast 
number  of  necessary  office  transactions  resulting  from  the 
weekly  collection  of  premiums  from  the  houses  of  the 
insured  and  the  character  of  the  class  of  risks  assumed 
under  industrial  policies.  It  would  carry  us  too  far  to 
discuss,  even  in  a  general  way,  the  office  and  field  admin- 
istration of  an  industrial  company,  and  my  remarks  are 
limited  to  essential  points. 

First.  The  calculation  of  premium  charges  for  both 
infantile  and  adult  risks  is  upon  an  actuarial  basis  derived 
from  trustworthy  mortality  tables.  The  premiums  vary 
with  age,  but  there  are  practically  no  restrictions  as  to 
occupations  or  residence,  Careful  inquiry  is  made  as  to 
the  moral  character  of  the  risks  assumed. 

Second.    The  collection  of  premiums  from  the  houses 


386  YALE  READINGS  IN  INSURANCE 

of  the  insured  is  made  by  authorized  collectors,  or  agents, 
who  are  under  a  most  effective  system  of  supervision,  sup- 
plemented by  an  audit  system  of  weekly  accounts  and 
debits  and  credits,  by  which  defalcation,  fraud,  and  in- 
tentional errors  are  made  difficult  and,  generally  speaking, 
impossible.  Every  policy-holder  has  a  premium  receipt 
book  in  which  the  weekly  payments  must  be  entered  by 
the  agent,  while  at  the  same  time  a  corresponding  entry 
is  required  to  be  made  in  the  agent's  collection  book. 
The  system  has  worked  so  well  that  during  the  half-century 
since  industrial  insurance  has  been  in  operation  no  im- 
portant alterations  have  been  made  in  this  branch  of  office 
practice. 

Third.  To  every  person  insured  a  policy  is  issued  which 
in  all  essentials  conforms  to  the  contract  issued  to  ordinary 
policy-holders.  The  language  used  is  so  plain  and  free 
from  confusing  technicalities  that  it  is  seldom  indeed  that 
there  are  controversies  or  misunderstandings  between  the 
company  and  the  insured.  The  contract  provides  for  a 
definite  sum  payable  in  the  event  of  death  in  return  for  a 
definite  weekly  premium,  but  in  addition  certain  privi- 
leges and  options  are  granted  to  the  insured,  which  provide 
for  a  paid-up  policy  after  three  years,  for  additional  bene- 
fits after  five  years,  for  cash  dividends  after  fifteen  years, 
and  for  cash  surrender  value  after  twenty  years. 

Fourth.  Every  policy  contains  a  provision  that  all 
premiums  must  be  paid  in  advance  on  the  Monday  of  the 
week  for  which  they  are  due.  In  the  event  of  a  policy 
being  more  than  four  weeks  in  arrears  for  non-payment 
of  premiums,  the  agent  is  required  to  report  the  policy 
for  lapse.  Most  of  the  lapses  of  industrial  policies  occur 
during  the  early  weeks  of  policy  duration,  when  only  a  few 
premiums  have  been  paid.  Policies  can  be  revived  with- 
out difficulty  provided  the  arrears  do  not  exceed  one  year, 
but  it  is  required  that  the  applicant  for  revival  pass  a 
medical  examination,  or  furnish  other  evidence  of  being 
in  good  health.  There  are  no  fines  and  every  facility  is 


INDUSTRIAL  INSURANCE  387 

granted  to  keep  the  policy  in  force.  If  the  arrears  exceed 
thirteen  weeks  the  policy  may  be  revived  without  the 
payment  of  arrears,  but  in  place  thereof  a  non-interest- 
bearing  lien  will  be  issued,  the  amount  of  which  is  deducted, 
in  the  event  of  death,  from  the  face  value  of  the  policy. 

Fifth.  In  the  event  of  death  every  effort  is  made  to 
pay  the  claim  as  soon  as  possible  to  carry  into  effect  the 
general  intent  of  industrial  insurance,  to  provide  for 
the  burial  expenses  of  the  insured.  The  proof  of  death, 
however,  requires  to  be  supplemented  by  documentary  evi- 
dence—  (a)  claimant's  certificate;  (6)  certificate  of  iden- 
tity; (c)  certificate  of  the  superintendent  or  assistant 
superintendent;  (d)  certificate  of  the  undertaker;  (e)  cer- 
tificate of  the  attending  physician. 

Sixth.  The  agency  system  of  industrial  companies  is  in 
a  measure  unique  and  deserving  of  special  mention.  A 
large  number  of  agents  are  necessarily  required  to  conduct 
the  office  and  field  operations  of  a  company  insuring 
millions  of  risks,  for  I  may  say  in  passing  that  95  per  cent, 
of  the  entire  industrial  business  is  carried  on  by  three 
companies.  The  office  organization  consists  of  a  large 
number  of  departments,  which  cannot  very  well  be  dealt 
with  on  this  occasion.  The  field  operations  require  a  super- 
intendent in  charge  of  a  district,  who  has  the  assistance  of  a 
number  of  assistant  superintendents,  under  whom  is  an 
agency  force  that  varies  in  number  according  to  the  size 
of  the  territory.  On  an  average  an  agent  collects  from 
about  five  hundred  to  six  hundred  policy-holders,  but  his 
compensation  is  so  adjusted  that  it  is  necessary  for  him 
in  addition  to  solicit  for  new  business.  By  this  means  it 
is  to  his  pecuniary  interest  to  prevent  the  lapsing  of 
policies  and  to  increase  as  far  as  possible  the  number  of 
policies  in  force.  The  amount  of  collectible  premiums  is 
called  the  "debit,"  and  the  agent  is  held  responsible  for 
the  condition  of  his  accounts.  His  books  and  papers  are 
periodically  inspected  by  assistant  superintendents,  who 
have  a  thorough  knowledge  of  the  business  and  are  per- 


388  YALE  READINGS  IN  INSURANCE 

sonally  familiar  with  all  the  insured,  so  that  in  the  event 
of  the  resignation  or  death  of  the  agent  there  is  no  inter- 
ruption or  intermission  in  the  collection  of  the  weekly 
premiums. 

We  may  now  consider  the  place  of  industrial  insurance 
in  practical  economics.  President  Hadley  very  properly 
draws  a  distinction  between  public  and  private  wealth, 
and  points  out  that  "the  growth  of  material  wealth  de- 
pends upon  causes  far  deeper  and  more  profound  than  those 
that  the  statesman  can  control."  In  life  insurance  we  have 
a  species  of  material  wealth  representing  more  than  two- 
and-a-quarter  billions  of  accumulated  funds  as  security 
for  the  faithful  discharge  of  promises  made  and  obliga- 
tions incurred,  and  in  addition  a  vast  amount  of  economic 
security  resulting  from  the  successful  elimination  of  a 
risk  inherent  in  the  uncertainty  of  life.  May  we  not 
properly  speak  of  life  insurance,  and  in  particular  of 
industrial  insurance,  as  "public  wealth"  in  the  true  and 
complete  sense  of  President  Hadley 's  definition?  He 
insists  upon  the  supreme  importance  of  security  and  the 
institution  of  property,  to  render  possible  the  progress, 
social,  moral,  and  ecomonic,  of  the  race,  for  it  is  only  by 
accumulated  wealth  that  men  are  more  or  less  removed 
from  the  immediate  and  destructive  pressure  of  poverty. 
While,  no  doubt,  much  of  human  poverty  is  unavoidable 
and  inherent  in  the  very  constitution  of  society,  a  vast 
amount  of  existing  misery  is  preventable  by  the  develop- 
ment of  right  habits  of  saving  and  insurance  —  by  frugality 
and  intelligent  industry.  Abstinence  from  the  immediate 
use  of  money  as  soon  as  earned  is  of  the  utmost  importance 
in  the  economic  development  of  the  people.  No  other 
means  have  yet  been  discovered  to  insure  the  economic 
security  of  the  masses  as  effectually  as  by  insurance. 
Hadley  well  says  that  "Great  evils  arise  from  trusting  too 
much  to  Providence  and  not  making  a  distinct  personal 
effort  to  meet  the  contingencies  of  life,"  and  no  method 
has  yet  been  devised  by  which  the  contingency  of  death, 


INDUSTRIAL  INSURANCE  389 

especially  of  premature  death,  can  be  better  provided  for 
than  by  life  insurance.  While  the  sphere  of  industrial 
insurance  is  limited  to  security  against  relatively  small 
losses,  they  are  large  indeed  when  considered  from  the 
viewpoint  of  the  masses  who  consume  their  weekly  wages 
almost  as  soon  as  earned. 

The  place  of  life  insurance  in  social  economics  is  most 
important.  The  accumulation  of  capital,  the  struggle 
of  the  masses  for  property  and  economic  independence, 
the  possibility  of  a  more  equitable  and  general  distribution 
of  wealth,  are  all  problems  which  rest  fundamentally  upon 
the  power  and  habits  of  the  people  to  save.  But  saving 
habits  are  acquired  only  with  great  difficulty  and  the 
ordinary  savings  bank  is  far  from  being  the  evidence  of 
workingman's  thrift  which  it  is  often  assumed  to  be.  Mr. 
Carroll  D.  Wright  estimates  that  not  more  than  one-half 
of  the  sum  on  deposit  with  savings  institutions  represents 
accumulations  of  wage-earners,  the  remainder  being  the 
investments  of  the  relatively  well-to-do.  Industrial  in- 
surance serves  both  an  economic  and  a  social  purpose.  It 
is  the  most  effective,  even  though  perhaps  the  most  ele- 
mentary, education  in  thrift  which  has  yet  been  developed. 
The  weekly  premium  payments  develop  systematic  habits 
of  saving  and  lead  to  the  accumulation  of  millions  which, 
but  for  this  method  of  insurance,  would  be  expended  largely 
for  needless  and  often  for  vicious  purposes.  The  usual 
method  of  accumulating  savings  banks  deposits  is  in 
marked  contrast  to  industrial  insurance  premium  pay- 
ments, in  that  as  a  rule  deposits  are  made  at  irregular 
intervals  and  not  in  the  small  sums  which  represent  true 
foresight,  frugality,  and  abstinence  from  needless  expendi- 
tures. 

The  weekly  premium  payments  soon  become  a  habit 
of  life,  even  with  the  young,  who  in  time  learn  to  pay  for 
their  own  insurance  the  five  or  ten  cents  a  week  necessary 
to  meet  the  expense.  The  education  in  thrift,  however, 
does  not  end  here.  Systematic  habits  of  saving  are  de- 


390  YALE  READINGS  IN  INSURANCE 

veloped  which  have  their  effect  in  other  directions,  and 
the  conclusion  is  quite  in  accordance  with  our  experience 
that  general  saving  habits,  accumulations  hi  savings 
banks,  or  payments  for  building  loans,  follow  industrial 
insurance  rather  than  precede  it,  and  are  most  widely 
diffused  among  the  people  where  industrial  insurance  is 
most  general  as  a  mode  or  method  of  family  protection. 
For  illustration,  in  this  country,  Philadelphia,  and  Dayton, 
Ohio,  are  often  referred  to  as  cities  in  which  building  and 
loan  associations  have  made  most  progress,  but  they  are 
also  cities  in  which  industrial  insurance  is  most  general 
as  a  method  of  family  insurance.  In  England,  it  is  claimed 
on  good  authority  that  school  savings  banks  and  penny 
provident  funds  have  been  most  successful  in  Manchester, 
Liverpool,  and  Birmingham,  but  these  are  also  the  cities 
in  which  industrial  insurance  is  almost  universal,  so  much 
so  that  at  least  four-fifths  of  the  entire  population  hold 
industrial  policies. 

Industrial  insurance  is  not  only  of  great  value  as  an  aid 
to  the  development  of  general  saving  habits  and  the 
accumulation  of  property,  but  it  is  a  contributory  agent 
of  great  importance  in  the  progress  and  public  apprecia- 
tion of  other  forms  of  insurance  —  ordinary  life,  fraternal, 
accident,  fire,  etc.  Industrial  insurance  has  enormously 
extended  the  field  of  other  forms  of  insurance  by  familiar- 
izing the  mass  of  the  population  with  the  elementary  prin- 
ciples and  beneficial  results  of  a  method  of  life  insurance 
especially  adapted  to  special  needs.  It  came  into  existence 
in  the  United  States  at  a  time  when  public  faith  in  finan- 
cial institutions,  savings  banks,  ordinary  life  insurance 
companies,  and  especially  so-called  workingmen's  insur- 
ance on  the  cooperative  plan,  was  profoundly  shaken  by 
panics  and  financial  depressions  and  evidences  of  mis- 
management and  fraud.  It  has  kept  faith  with  the  people 
and  every  promise  made  has  been  faithfully  performed. 
Security,  stability,  permanency  has  been  the  watchword, 
and  no  social  institution  of  to-day  is  established  on  a  more 


INDUSTRIAL  INSURANCE  391 

scientific  and  trustworthy  theory  of  mortality  and  finance 
than  the  vast  structure  of  industrial  insurance  with  its 
forty  millions  of  policy-holders  in  different  parts  of  the 
world.  It  is  not  going  too  far  to  say  that  this  method 
of  life  insurance  protection  forms  to-day  one  of  the  most 
effective  measures  making  directly  or  indirectly  for  accu- 
mulation of  property.  However  small  the  premium  pay- 
ments and  however  small  in  many  cases  the  individual 
returns,  the  fact  remains  that  fifty-two  times  a  year  pay- 
ments are  made,  and  these  lessons  in  thrift  and  accumula- 
tion are  taught  and  brought  home  to  an  element  of  the 
population  which  is  most  in  need  thereof. 

We  often  hear  the  old  complaint  that  there  is  no  real 
progress,  but  only  a  shifting  of  wealth,  by  which  the  poor 
are  made  poorer  and  the  rich  grow  richer.  Relatively  this 
is  true,  for,  by  contrasts,  in  a  more  advanced  society  the 
condition  of  the  very  poor  becomes  more  striking  and 
apparently  less  necessary.  Actually,  however,  our  progress 
during  the  past  half-century  has  been  real  and  of  vast 
benefit  to  the  mass  of  our  population,  who  in  an  ever- 
increasing  proportion  are  attaining  a  relatively  high  degree 
of  economic  security  and  social  well-being.  The  object  of 
all  thrift  agencies  is  to  aid  persons  to  become  savers  in  the 
first  instance  and  to  accumulate  a  fund  for  future  contin- 
gencies, but,  second,  "that  they  may  have  the  conscious- 
ness of  being  removed  (by  their  own  efforts)  from  the 
burden  of  relief  receiving." 

Industrial  insurance  provides  a  sum  certain,  from  $15  to 
$1000,  at  a  time  when  in  many  households  no  ready  money 
is  otherwise  available  for  the  expenses  incident  to  death 
and  the  last  illness.  The  problem  reduces  itself  to  the 
necessity  that  the  burial  of  the  father  or  the  child  must  be 
paid  for,  that  it  will  cost  at  least  from  $15  to  $100,  and 
that  this  sum  must  be  provided  for  either  by  the  convenient 
method  of  industrial  insurance  or  by  a  draft  upon  a  pos- 
sible sum  accumulated  during  years  of  careful  husbandry 
of  slender  resources  or  by  incurring  a  non-productive  debt 


392  YALE  READINGS  IN  INSURANCE 

with  the  undertaker  and  the  doctor.  With  the  last  as 
the  alternative,  it  is  an  open  question  whether  an  under- 
taker can  be  found  who  will  take  the  risk,  and  there  will 
often  be  no  escape  from  the  necessity  of  an  appeal  to  the 
public  poor  fund,  or  private  charitable  relief.  The  poor 
have  their  standard  of  life  and  customs  as  thoroughly 
established  as  the  well-to-do  or  the  rich,  and,  however 
humble  their  station,  they  prefer  the  burial  of  their  dead 
at  their  own  expense  in  a  manner  which  to  them  represents 
the  common  decencies  of  life.  Deep  at  the  root  of  the 
problem  of  life  insurance  for  the  poor  lies  their  abhorrence 
of  a  pauper  burial  and  their  willingness  to  provide  out  of 
present  savings  for  a  future  contingency,  and  the  ever 
present  possibility  of  premature  or  unexpected  death. 
As  the  result  of  the  introduction  of  industrial  insurance 
into  the  United  States,  which  now  returns  to  policy-holders 
about  $25,000,000  per  annum  in  the  payment  of  claims 
alone,  the  relative  number  of  pauper  burials  has  been 
materially  reduced  during  the  past  twenty  years.  On  the 
basis  of  a  conservative  estimate  there  would  be  25,000 
more  pauper  burials  per  annum  in  American  cities  if  this 
system  were  not  in  almost  universal  operation.  From  a 
moral  and  sentimental  point  of  view,  therefore,  the  value 
of  industrial  insurance  as  making  for  a  higher  standard 
of  family  life  cannot  be  overestimated.  It  certainly 
is  a  matter  of  considerable  importance  in  the  life  and 
struggle  of  many  who  are  on  the  very  verge  of  pau- 
perism and  dependency  to  know  that,  at  the  end  of  their 
earthly  difficulties,  they  will  not  be  cast  away  in  a  potter's 
field. 

But  the  good  effect  of  industrial  insurance  as  a  direct 
means  of  reducing  pauperism  does  not  end  here.  In  many 
instances  a  sufficient  sum  remains,  after  the  payment  of 
funeral  and  doctor's  bills,  to  establish  the  widow  in  some 
kind  of  business,  on  a  small  scale,  but  sufficient  to  provide 
the  necessary  means  for  herself  and  children.  As  a  rule 
there  will  be  other  savings  available,  for,  as  I  have  already 


INDUSTRIAL  INSURANCE  393 

said,  industrial  insurance  suggests  the  advantage  and 
importance  of  other  forms  of  investment  and  encourages 
economy  in  family  expenditures.  How  far  the  burden  of 
poor  relief,  indoor  and  out,  is  diminished  cannot  be  stated 
with  even  approximate  accuracy,  but  we  have  some  very 
significant  data  for  certain  states  and  cities  which  indicate 
that,  regardless  of  a  large  immigration,  there  has,  during 
recent  years,  been  a  relative  and  substantial  decrease  in 
the  number  of  paupers  and  the  amount  paid  for  poor 
relief. 

The  indirect  results  of  industrial  insurance  are,  therefore, 
of  very  considerable  importance.  Just  as  the  vast  accu- 
mulations in  savings  banks  are  to  a  considerable  extent 
the  aggregate  of  a  large  number  of  small  deposits,  so  in 
industrial  insurance  the  assets  of  about  one  hundred  and 
fifty  million  dollars  held  as  reserve  and  surplus  represent 
a  vast  amount  of  capital  as  the  result  of  small  weekly 
payments  which  average  about  ten  cents.  These  accu- 
mulations do  not  stand  for  idle  capital  but  for  public 
wealth  in  the  complete  sense  of  the  term.  It  is  wealth 
made  available  for  the  conduct  of  general  business,  of 
active  enterprise,  and  other  social  and  economic  ends. 
Of  the  three  billions  of  assets  held  by  American  life  insur- 
ance companies,  75  per  cent,  are  invested  in  stocks,  bonds, 
and  mortgages,  8  per  cent,  in  real  estate,  6  per  cent,  in  loans 
on  policies,  and  the  remainder  in  other  forms  of  invest- 
ment and  as  cash  in  bank.  The  absolute  necessity  for 
life  insurance  companies  to  earn  a  certain  rate  of  interest 
on  their  investments  makes  it  of  the  highest  importance 
that  the  assets  should  be  constantly  employed  in  profitable 
enterprises,  thus  increasing  materially  the  national  pros- 
perity and  social  security  of  the  people. 

I  do  not  go  too  far,  then,  when  I  hold  that  the  indirect 
results  of  this  form  of  insurance  with  its  habits  of  sys- 
tematic savings  are  at  least  equally  as  important  as  the 
direct  results  represented  by  the  annual  payment  of  over 
$25,000,000  in  claims,  etc.,  to  industrial  beneficiaries. 


394  YALE  READINGS  IN  INSURANCE 

The  creation  of  capital  by  this  method  of  insurance  is 
indeed  of  far-reaching  importance,  even  to  the  laborer  or 
wage-earner  whose  economic  security  and  opportunity 
for  employment  is  enhanced  by  the  real  amount  of  capital 
thus  made  available  for  increased  production.  There  is 
no  more  generally  accepted  postulate  in  economics  than 
that  "in  proportion  to  the  increase  in  capital  the  share 
of  the  annual  product  falling  to  capital  is  augmented 
absolutely  but  diminished  relatively,  while  the  share 
falling  to  labor  is  increased  both  absolutely  and  rela- 
tively." Considered  from  this  point  of  view  alone,  indus- 
trial insurance  makes  for  a  more  general  and  equitable 
distribution  of  wealth. 

The  success  of  industrial  insurance  may  be  summed  up 
in  a  remark  made  by  Abraham  Lincoln  that  "with  public 
sentiment  on  its  side  everything  succeeds  —  with  public 
sentiment  against  it  nothing  succeeds."  This  system  of 
family  insurance  forms  an  integral  part  of  the  domestic 
economy  of  the  American  people.  Organized  in  the  State 
of  New  Jersey,  the  progress  in  local  development  has  been 
most  complete  in  that  State  and  in  the  adjoining  states 
of  New  York  and  Pennsylvania.  In  New  Jersey  there  are 
now  about  1,500,000  industrial  policies  in  force,  repre- 
senting about  65  per  cent,  insured  population.  In  certain 
sections  of  Newark,  of  New  York  City,  of  Philadelphia, 
and  other  large  cities,  the  system  is  so  general  that  from 
75  per  cent,  to  95  per  cent,  of  all  insurable  persons  hold 
industrial  policies. 

We  have  made  a  number  of  investigations  to  ascertain 
the  actual  extent  of  industrial  insurance  in  various  cities 
and  there  is  one  significant  fact  which  we  have  learned, 
especially  in  and  around  Newark,  that  the  proportion 
of  population  insured  on  the  industrial  plan  is  somewhat 
higher  among  those  who  own  their  own  homes  than  among 
those  who  do  not.  Whether  as  cause  or  effect,  the  fact 
remains  that  the  progress  and  development  of  the  business 
has  been  most  satisfactory  among  the  thrifty  and  stable 


INDUSTRIAL  INSURANCE  395 

element  of  our  industrial  population.  We  can  go  further 
and  say  that  policy-holders  are  in  other  respects  a  superior 
class.  For  illustration,  we  find  by  our  mortality  statistics 
that  the  death  rate  of  insured  children  is  less  than  the 
normal  mortality  in  the  general  population  as  determined 
by  the  census.  Our  percentage  of  deaths  from  intem- 
perance and  alcoholism  is  less  than  the  expected  by  the 
general  standard  of  mortality,  and  finally,  we  find  that 
our  ratio  of  deaths  from  homicide  and  suicide  is  below 
the  average  for  the  country  at  large.  I  mention  these  facts, 
which  are  supported  by  irrefutable  evidence,  to  show  that 
there  is  a  close  relation  between  industrial  insurance  and 
the  progress  and  well-being  of  the  industrial  population, 
and  that  the  policy-holders  represent  a  more  thrifty,  more 
temperate,  and  more  law-abiding  element  than  the  un- 
insured. 

It  remains  for  me  to  speak  of  the  evolution  of  industrial 
insurance  and  the  adaptation  of  the  business  to  new 
conditions.  When  established  in  1875,  the  financial  and 
industrial  conditions  were  such  as  to  call  for  an  elementary 
form  of  life  insurance  with  absolute  security  as  the  first 
consideration.  By  slow  degrees  public  confidence  in 
insurance  and  financial  institutions  was  restored,  and  as 
early  as  1881  it  become  necessary  to  issue  a  special  policy 
for  the  round  sum  of  $500  to  meet  a  distinct  and  increas- 
ing demand  from  the  superior  element  of  our  industrial 
population.  By  1886  the  insurance  education  of  the 
masses  had  gone  far  enough  to  make  it  seem  advisable, 
and  in  fact  necessary,  to  establish  an  ordinary  depart- 
ment. That  was  less  than  twenty  years  ago,  but  during 
the  intervening  period  the  three  industrial  companies 
which  transact  95  per  cent,  of  the  business  in  this  country 
have  built  up  a  vast  ordinary  business,  with  about  720,000 
policies  and  $800,000,000  of  insurance  in  force.  At  least 
one-half  of  this  sum,  and  perhaps  three-fifths,  represents 
ordinary  insurance  on  the  lives  of  wage-earners,  or  persons 
in  positions  or  situations  practically  outside  of  the  field 


396  YALE  READINGS  IN  INSURANCE 

of  the  solicitor  for  exclusively  ordinary  companies.  The 
number  of  persons  insured  with  industrial  companies  for 
both  industrial  and  ordinary  is  indeed  quite  large  and 
constantly  increasing.  The  industrial  policies  are  held 
for  the  payment  of  expenses  incident  to  death,  the  ordinary 
for  family  protection,  child  education,  and  other  purposes 
of  social  and  economic  importance.  Coincident  with  the 
progress  and  evolution  of  industrial  insurance  there  has 
been  a  material  improvement  in  the  industrial  policy 
contract,  which  to-day  contains  all  the  essential  and 
important  provisions  and  privileges  of  the  regular  ordinary 
policy.  Thus  we  see  how  close  the  relation  is  between  the 
two  forms  of  insurance  and  how  important  industrial 
insurance  is  as  an  education  in  general  insurance  theory 
and  practice,  making  gradually  but  with  certainty  for 
the  social  and  economic  security  of  the  people. 

If  there  is  any  one  thing  that  "social  classes  owe  to  each 
other, "  it  is  that  all  shall  aim  and  work  to  diminish  the 
needless  suffering  and  unnecessary  burdens  of  those  for 
whose  well-being  and  future  protection  we  are  individually 
or  socially  responsible.  The  mass  of  our  population  is 
engaged  in  a  heroic  struggle  to  escape  from  poverty  to 
relative  economic  and  social  freedom,  and  whatever  con- 
tributes toward  this  much-to-be-desired  end  is  deserving 
of  sympathetic  consideration.  I  believe  that  in  industrial 
insurance  we  have  a  most  valuable  aid  in  this  determina- 
tion for  social  betterment  on  a  large  scale,  and  the  evidence 
is  conclusive  that  a  vast  amount  of  direct  and  indirect 
good  is  accomplished  by  this  elementary  but  effective 
form  of  thrift.  During  the  almost  thirty  years  since 
industrial  insurance  has  been  in  active  operation  in  this 
country,  gradual  but  constant  progress  has  been  made 
toward  a  higher  degree  of  social  efficiency,  so  that  we  may 
hopefully  look  forward  and  anticipate  a  time  when  this 
form  of  insurance  will  be  indeed  a  social  institution  of 
universal  utility,  in  every  respect  a  far-reaching  power  for 
good,  directly  to  the  people  and  indirectly  to  the  nation. 


INDUSTRIAL  INSURANCE  397 

I  believe  that  the  evidence  warrants  the  conclusion  that 
industrial  insurance  makes  first  for  private  wealth  and 
second  for  public  wealth,  as  well  as  directly  and  indirectly 
for  the  all-important  aim  and  end  of  a  higher  degree  of 
security  for  the  industrial  population  of  this  land. 


INDEX 


Actuaries  table  of  mortality,  for- 
mation of,  110-111. 

Age,  insurable,  limits  of,  217;  rea- 
sons for  limiting,  221. 

Agents,  necessity  of,  256-259;  ex- 
perience of  English  companies 
without  agents,  254-256;  ex- 
penses of,  254-259;  agency 
system  in  industrial  insurance, 
387-388. 

Alabama,  regulation  by  law  of  pol- 
icy conditions  in,  317-318. 

Alcohol,  effect  on  longevity,  26. 

American  experience  table  of  mor- 
tality, formation  of,  111-112, 
given  in  detail,  157. 

American  Life  Insurance  Company 
of  Philadelphia,  wrecking  of, 
301. 

Amicable  Society,  origin  of,  67; 
plans  of,  68-69,  127. 

Ancient  Order  of  United  Workmen, 
organization  of,  94;  plans  of, 
125-126;  growth  of,  128-129. 

Annuities,  effect  on  origin  of  life 
insurance,  44. 

Application,  details  required  in, 
212-213;  as  part  of  policy, 
222. 

Armstrong  laws,  provisions  of  in 
regard  to  policy-holders'  vot- 
ing, 308. 

Assessment  life  insurance  com- 
panies, origin  of,  93;  general 
description  of  plans,  122-131 ; 
reasons  for  origin,  122-123; 
methods  of,  216;  organized  for 
purely  business  purposes,  145; 
decline  of,  130-131. 

Assessments,  plan  of  in  fraternal 
societies,  141-144. 

Assets,  taxation  of,  369-370. 


Australian  Mutual  Provident  Soci- 
ety, method  of  voting  by  pol- 
icy-holders adopted  by,  311. 


Baines,  quoted  in  regard  to  increas- 
ing longevity,  288. 
Barnes,  William,  quoted  in  regard 

to  deferred  dividend  plans,  275. 
Beneficiary,     lack     of     investment 

knowledge  possessed  by,   235; 

methods  of  providing  for,  236. 
Bills  of  mortality,  origin  of,  49;  use 

of,  50. 
Blood-spitting,     mortality     among 

those  with  a  history  of,  115. 
Bubble  Act  of  1720  and  its  effect  on 

English  life  insurance,  72. 
Business,  amount  of  new,  regulated 

by  Armstrong  law,  319. 


C 


Carlisle  mortality  table,  formation 

of,  109. 

Champion  v.  Ames,  case  cited  in  re- 
lation to  federal  supervision  of 

insurance,  355. 
Chance,  meaning  of,  98;  effect  of  an 

economic  activity,  99. 
Civil  War,  effect  on  growth  of  life 

insurance,  87. 
Colonies,    insurance    in    American, 

77-80. 
Comity,     meaning    of    state,     330; 

results  of  on  state  supervision 

of  insurance,  330-331. 
Commissioners  of  insurance,   state, 

political  character  of,  322-323. 
Companies,    various  kinds   of,   299; 

methods  of  controlling  mixed, 


399 


400 


INDEX 


303-304;  theory  of  government 
in  mutual  companies,  304-305. 

Connecticut  Mutual  Life  Insurance 
Company,  organization  of,  86- 
87. 

Cost  of  insurance,  definition  of,  181 ; 
calculated,  160;  given  for  vari- 
ous ages,  161;  as  a  basis  for 
distributing  expenses,  262-263; 
effect  of  increasing  cost  on 
fraternal  associations,  144- 
146. 

Cost  of  living  in  relation  to  life 
insurance,  20. 

Crusades,  effect  of  on  insurance,  42. 


D 


Dawson,  M.  M.,  selection  from  on 
assessment  insurance,  122-131; 
author  of  modified  preliminary 
term  system  of  reserves,  203; 
author  of  select  and  ultimate 
system  of  valuation,  204. 

Deferred  dividends,  arguments  in 
favor  of,  280-286. 

De  Moivre,  contribution  of,  74. 

De  Witt,  contribution  of,  47. 

Diphtheria,  amount  of  which  is  pre- 
ventable, 291. 

Disease,  prevention  of,   291-292. 

District  of  Columbia,  reasons  for 
poor  insurance  laws,  331-332. 

Dividends,  early  methods  of  declar- 
ing, 89-90;  various  plans  of 
distributing,  220;  system  of 
deferred  dividends  explained, 
273-286 ;  arguments  in  favor  of, 
276-286;  over-emphasis  of  sub- 
ject of,  241-242.  ' 

Dryden,  John  F.,  selection  from  on 
industrial  insurance,  382-397. 

Dueling,  policy  clauses  regarding, 
225. 


E 


"Educational  Leaflets,"  issued  by 
Mutual  Life  of  New  York,  selec- 
tion from,  192-206. 

Elections,  expense  of  annual  elec- 
tions, 309. 

Emery,  H.  C.,  quoted  in  foot-note, 
12. 


Endowment  policies,  definition  of, 
215. 

Episcopal  Corporation,  origin  and 
plans  of,  81-82. 

Equitable  Assurance  Society  of 
London,  origin  of,  128;  effect 
on  American  life  insurance  de- 
velopment, 88-89. 

Expenses,  loading  for,  175-182; 
various  lands  of,  176-177;  plans 
of  providing  for,  175-176; 
plans  of  providing  for  expenses 
of  new  business,  177-178;  of 
providing  for  agents,  254-259; 
of  first  year  of  insurance,  199, 
264—266;  laws  regulating  ex- 
penses for  new  business,  318- 
319;  methods  of  providing  for 
investment  expenses,  180,  261 ; 
general  expenses,  180-181,  190- 
201,  262-264;  of  settlement, 
179-180;  of  renewals,  179; 
expense  element  in  fraternals, 
147-148. 


F 


Failures  of  life  insurance  companies, 
causes  of,  90-92;  effect  on 
growth  of  assessment  com- 
panies, 126. 

Fair,  quoted  in  regard  to  vital 
statistics,  290. 

Federal  supervision  of  insurance, 
general  considerations,  334— 
362;  arguments  in  favor  of, 
331;  absence  of,  359;  necessity 
of,  360-362;  probabilities  of 
securing,  336-354 ;  decisions 
of  Supreme  Court  affecting, 
354-355;  relation  of  "lottery 
cases"  to,  355-358. 

Fees,  system  of  levying  by  states, 
366. 

Finkelnburg,  quoted  in  relation  to 
longevity,  288. 

Fire  insurance,  first  company  hi 
America,  79. 

Fisher,  Irving,  selection  from  on 
methods  of  eliminating  risk, 
1-13;  on  the  problem  of  length- 
ening human  life,  287-298. 

Fouse,  L.  G.,  selection  from  on 
policy  contracts,  207-233. 


INDEX 


401 


Francis,  John,  selection  from  on 
early  beginnings  of  life  insur- 
ance, 36-45;  on  the  origin  of 
insurance  theory,  46-56. 

Fraternal  life  insurance,  general 
consideration  of,  132-154;  ori- 
gin of,  132-134;  growth  of, 
95-96 ;  technical  organization 
of,  136-141;  methods  of,  216; 
contracts  issued  by  fraternal 
societies,  139-140;  strength  of, 
135-136,  152;  causes  of  fail- 
ure, 143-144;  failures  of,  153. 

Friendly  societies  of  England,  rules 
of  ancient,  38-39;  prevalence 
of,  134-135. 

Function  of  life  insurance,   14-35. 


G 


Girard    Life    Insurance    and    Trust 

Company,  early  plans  of,  84. 
Gorgas,    Col.,    results    of    sanitary 

measures  in  Havana,  289. 
Graduation,  meaning  of  as  applied 

to       mortality      tables,       120; 

methods  employed,  120-121. 
Graunt,    John,    contribution    of    to 

insurance  theory,  51. 
"Graveyard  insurance,"  evil  results 

of,  7. 
Greene,  Jacob  H.,  selection  from  on 

surrenders  and  loans,  246-253. 
"Guarantees"     as     a     method     of 

eliminating  risk,  2. 
Guilds,    as    insurance    institutions, 

37;  elements  of  life  insurance  in 

guild  system,  134-135. 


II 


Hadley,  Pres.,  quoted,  2,  12,  21, 
388. 

Halley,  contribution  to  theory  of 
life  insurance,  54-55. 

Healthv  English  mortality  table, 
110. 

Hedging,  practice  of,  explained,  12. 

History  of  life  insurance,  early  be- 
ginnnings,  36-45;  origin  of 
theory,  46-56;  in  Great  Brit- 
ain, 57-76;  in  the  United  States, 
77-96. 


Holcombe,  John  M.,  selection  from 
on  function  of  life  insurance, 
14-35;  on  agency  expenses,  254- 
259. 

Homans,  Sheppard,  author  of  ton- 
tine dividend  plan,  275;  author 
American  mortality  table,  111. 

Home  Life  Insurance  Company  of 
New  York,  control  by  stock, 
303. 


Incontestability,  extent  of  clause, 
220;  treatment  of  by  various 
companies,  226-228. 

Industrial  insurance,  general  con- 
sideration of,  382-397;  origin 
of,  135-136,  383-384;  purpose 
of,  382;  practice  of,  385-387; 
methods  of,  216;  extent  of, 
384-385 ;  benefits  accruing  from, 
388-94. 

Insurable  interest,  deferred,  208. 

Insurance,  moral  effects  of,  7;  as  a 
means  of  eliminating  risk,  4. 

Insurance  company  of  North  Amer- 
ica, life  plans  of,  82. 

Insurance  departments,  inefficiency 
of,  321-322. 

Intemperance,  effect  of,  220;  care 
exercised  in  selecting  against, 
226. 

Interest,  use  of  in  insurance  calcu- 
lations, 155-156;  effect  of  dif- 
ferent rates  of  on  reserve,  193. 

Investments,  social  effect  of,  30; 
regulation  of,  313;  evil  effects 
of  state  restrictions  on,  315- 
316. 

K 

Kingsley,  Darwin  P.,  selection  from 
on  federal  supervision  of  insur- 
ance, 334-362. 


Lankester,  Ray,  quoted  in  regard  to 
lengthening  human  life,  289. 

Lapse,  clauses  respecting,  220. 

Legal  regulation  of  annual  elec- 
tions, 307-310;  of  policies, 


402 


INDEX 


232-233;  of  fraternal  societies, 
148;  necessity  of  for  fraternal 
societies,  149-150. 

Life,  valuation  of  human  life,  18-20. 

Limited  payment  policies,  defini- 
tion of,  215. 

Litigation,  absence  of  in  life  insur- 
ance, 214. 

Loading,  various  methods  of,  175- 
176;  inadequacy  of  for  first 
year's  expenses,  199;  methods 
of  adding  to  net  premiums,  268. 

Loans,  policy,  general  considera- 
tions regarding,  246-253 ;  value 
of  in  keeping  policies  in  force, 
238-245;  arguments  against 
allowing,  252-253. 

Longevity,  amount  of  increase 
that  has  taken  place,  288-289; 
amount  of  possible  increase, 
287-298;  reasons  for  not  at- 
tempting to  increase,  287-288; 
ways  of  increasing,  294-295; 
result  on  premium  rates,  293. 

Lunger,  John  B.,  selection  from  on 
policy  conditions,  234—245. 


M 


Management  of  companies,  299- 
311. 

Marine  insurance,  effect  on  life 
insurance,  41;  in  the  United 
States,  77. 

Married  woman's  right  in  policy, 
28. 

Massachusetts  Hospital  Life  Insur- 
ance Company,  organization 
of,  83. 

Medical  examination,  necessity  for, 
118;  methods  of  dispensing 
with,  119-120. 

Metchnikoff,  quoted  as  to  longev- 
ity, 289. 

Metropolitan  Life  Insurance  Com- 
pany, proposed  plans  of  as  to 
health  campaign,  296. 

Michigan  Mutual  Life  Insurance 
Company,  control  by  stock, 
303. 

Military  service,  treatment  of  by 
various  companies,  219. 

Mismanagement,  exposure  of  in 
1905,  92-93. 


Misrepresentation,  Alabama  law 
concerning,  317-318. 

Mutual  Benefit,  organized,  86. 

Mutuak=tife  insurance,  origin  of, 
aSrgrowtVof,  87-88. 

Mutual  fcife  Insurance  Company 
of  New  York,  organization  of, 
86;  fight  for  control  of,  304- 
305;  selections  from  "Educa- 
tional Leaflets,"  192-206. 

Moir,  Henry,  selection  from  on 
mortality  tables,  107-121. 

Mortality,  results  on  of  various 
influences,  112-113;  investiga- 
tion into,  by  Actuarial  Soci- 
ety of  America,  114-116;  among 
poor  and  rich,  289;  relative 
male  and  female,  111-113. 

Mortality  tables,  general  considera- 
tion of,  107-121;  sources  of 
material  for,  107;  manner  of 
using,  158-160;  American  ex- 
perience table  an  ultimate 
table,  205;  American  experi- 
ence table  given,  157-158;  Fra- 
ternal Congress  table,  151. 


N 


National  Fraternal  Congress,  work 
of,  150-151. 

New  England  Mutual  Life  Insurance 
Company,  organization  of,  84. 

New  York  Life  Insurance  and 
Trust  Company,  organization 
of,  84. 

Nichols,  Walter  S.,  selection  from 
on  fraternal  insurance,  132- 
154. 

Non-participating  insurance,  defi- 
nition of,  215. 

Northampton  mortality  table,  ori- 
gin of,  108. 


Occupation,  treatment  of  by  vari- 
ous companies,  219;  restric- 
tions on,  223. 

Ordinary  life  policies,  definition  of, 
215. 

Origin  of  insurance  theory,  46-54; 
of  insurance,  62. 


INDEX 


403 


Paul  v.  Virginia,  case  cited  in  rela- 
tion to  Federal  supervision, 
352;  and  "lottery  cases,"  356- 
358. 

Pauper  burials,  decrease  in  as  result 
of  industrial  insurance,  392. 

Pelican  Life  Insurance  Company, 
establishment  of  office  in  United 
States,  83. 

Pennsylvania  Company  for  the  In- 
surance on  Lives,  organization 
of,  83. 

Pensions,  old  age,  21-22. 

Petty,  Sir  William,  contribution  of 
to  theory  of  insurance,  54. 

Philadelphia  Contributionship  for 
the  Insurance  of  Houses  from 
Loss  by  Fire,  organization  of, 
79-80. 

Phillips,  George  W.,  author  of  ton- 
tine dividend  scheme,  275. 

Physical  examinations,  effect  on 
men,  27. 

Plagues,  prevalence  of  in  Eng- 
land, 45;  causes  of,  48-50;  in 
the  United  States,  82. 

Policies,  contracts  in  general,  207- 
233;  definition  of  210;  methods 
of  constructing  new,  234-235; 
examples  of  early,  78-79;  207- 
208;  privileges  of,  219-220; 
variety  of,  215-216;  motives  in 
framing,  211;  methods  of  pro- 
viding for  settlement  of,  235- 
236;  coupon,  235;  conditions 
of,  234-245;  interference  of 
state  in  making,  209;  state 
regulation  of  policy  contracts, 
317-318;  arguments  in  favor 
of  legal  regulation  of,  232-233 ; 
objections  to  legal  regulation, 
232;  effect  of  investigation  of 
1905  on,  229-233;  contracts  in 
industrial  insurance,  386. 

Poverty  and  life  insurance,  27. 

Preliminary  term  method  of  valu- 
ation, explanation  of,  178— 
179;  use  of  by  new  companies, 
199—201;  arguments  in  favor 
of  use,  202;  objections  to  use, 
203;  modified  form  of,  ex- 
plained, 203-204. 
Premium  notes,  effect  on  early 


growth  of  insurance,  90;  func- 
tion of,  239. 

Premiums,  early  rates,  89;  detailed 
calculation  of,  155-174;  net 
single  premiums  for  whole  life, 
method  of  calculating,  163- 
167;  single  premiums  for  vari- 
ous ages,  168;  computation  of 
to  provide  for  expenses,  268; 
method  of  calculating  annual 
premiums,  169-173;  given  for 
various  ages,  174;  collection  of 
by  industrial  companies,  385- 
386;  amount  of  in  industrial 
insurance,  383;  taxation  of, 
371-375. 

Presbyterian  Corporation,  plans  of, 
80-81. 

Probability,  nature  of,  99. 

Prudential  Insurance  Company  of 
London,  origin  of,  136,  384. 

Prudential  Insurance  Company  of 
New  Jersey,  origin  of,  136; 
control  of,  301-302;  losses  due 
to  tuberculosis,  297. 

Publicity,  annual  reports  provided 
for,  313;  as  a  remedy  for  mis- 
management, 321 ;  reasons  for 
failure  of,  323-324. 


R 


Ransom  insurance,  as  an  origin  of 
life  insurance,  42—43. 

Reports,  value  of  annual,  325. 

Reserve,  method  of  calculation, 
183-191;  amount  needed  at 
various  ages,  191;  preliminary 
term  method  of  calculation, 
178-179;  lack  of  in  fraternals, 
140-148;  popular  ignorance 
concerning,  89,  124,  364;  tax- 
ation of,  379;  contingency  re- 
serve, 198. 

Responsibility,  necessity  of  secur- 
ing, 325-327. 

Retaliatory  laws,  353. 

Return-premium  plan,  introduction 
of,  239-240. 

Risk,  definition  of,  105;  theory  of, 
97-106;  elimination  of,  1-13; 
reduction  of  by  employers'  lia- 
bility companies,  296;  by  fire 
insurance  companies,  295 ; 


404 


INDEX 


treatment  of  substandard  risks, 
240-241. 

Roberston  law  regulating  invest- 
ments in  Texas,  316. 

Romans,  life  insurance  among,  36. 


S 


Salaries,  legal  regulation  of,  318; 
Missouri  law  concerning,  353. 

Sanitation,  results  of  better,  290. 

Selection,  meaning  of,  116;  ad- 
verse, 117-118;  effect  of  sur- 
renders on,  117. 

Smith,  Adam,  quoted,  15. 

Smith,  Gustavus,  W.,  selection  from 
on  net  premiums,  155-172; 
on  reserve,  183-191. 

Society  for  Assurance  for  Widows 
and  Orphans,  plans  of,  63. 

Speculation  as  a  method  of  elim- 
inating risk,  8. 

State  regulation,  general  considera- 
tions, 312-333;  origin  of,  327; 
various  lines  of,  313;  character 
of  since  1906,  314;  chaotic  con- 
ditions in,  352-353;  reasons  for 
failure  of,  328-330;  conclu- 
sions concerning,  320. 

Stock  companies,  control  of,  299- 
302. 

Suicide,  extent  of  clauses  against, 
219;  necessity  of  policy  clause 
against,  224. 

Surplus,  definition  of,  197-198;  dis- 
tribution of,  260-272;  state 
regulation  of  amount  of,  319- 
320. 

Surrenders,  general  considerations, 
246-253;  methods  of  allowing, 
242-243;  arguments  in  favor 
of  granting,  244;  effect  of 
withdrawals,  247 ;  arguments 
against,  248-252;  proper  charge 
for,  252;  importance  of  writing 
in  values,  237-238. 


Taxation,  general  considerations 
concerning,  363-381 ;  amount 
of,  363;  arguments  against, 
365-366;  in  favor  of,  364; 


necessity  for  reform  of,  363- 
381;  relation  to  general  prop- 
erty tax,  368-370;  of  assets, 
369-370;  discriminations  result- 
ing from  taxes  on  premiums, 
371;  burden  of  on  policy- 
holders,  372 ;  suggested  reforms, 
375-381. 

Theory,  origin  of  insurance,  46- 
56. 

Tontine  dividends,  plans  and  re- 
sults of,  273-276;  arguments  in 
favor  of,  280-286;  various 
classes  of,  277-280. 

Travel,  restrictions  on  226. 

Trustees,  "dummy,"  325-326. 

Tuberculosis,  amount  preventable, 
291 ;  losses  on  account  of,  297. 

Typhoid,  amount  preventable,  291. 


U 


Usury  laws,  effect  on  origin  of  life 
insurance,  58. 


Valuation,  of  liabilities,  definition 
of,  192;  general  consideration 
of,  192-206;  legal  standard  of, 
193-194;  method  of  calculat- 
ing, 194-198;  necessity  of  val- 
uation laws,  314-315;  results 
of  net,  f.  n.,  302;  select  and 
ultimate,  204-206;  preliminary 
term  system  of,  199-201 ;  modi- 
fied preliminary  term  system, 
203-204. 

Valuation  of  human  life,  18-20. 

Valuation  of  property,  14-16. 

Variation,  average,  103. 

Voting,  by  proxies,  304-305;  ex- 
penses of  policy-holders  voting, 
306;  methods  of  voting,  307- 
310;  substitute  for  proxy  vot- 
ing, 310. 

W 

Walford,  Cornelius,  selection  from 
on  history  of  insurance  in 
Great  Britain,  57-76. 

War  risks,  treatment  of,  223-224. 


INDEX 


405 


Wells,  Daniel  H.,  selection  from  on 

distribution    of    surplus,    200- 

272. 
Whiting,  William  D.,  selection  from 

on     provision     for     expenses, 

175-182. 
Willett,  Allan  H.,  selection  from  on 

the  nature  of  risk,  97-106. 


Women,  conditions  of  acceptance 
as  insurance  risks,  219;  as 
risks  compared  with  men,  221- 
222. 

Workingmen's  insurance,  possibil- 
ities of  fraternal  societies,  151. 


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